Normally the Reserve Bank is quite dismissive of the credit ratings agencies such as Standard & Poor’s and Moody’s, viewing them as remote (New York based), out of touch and with conflicts of interest they struggle to resolve about who their clients are – those being downgraded, or investors in the products being rated.
But there is now surprising agreement on one key point for all Australians after comments on Monday by RBA Governor Phil Lowe and a statement from Moody’s explaining why it cut the ratings of Australian banks on Monday night.
The two agreed that the outlook for the Australian economy and Australians generally over the next few years (“quarter of a century” in the case of Dr Lowe) is not all that promising, although Dr Lowe was again more upbeat on Monday than many other analysts about the immediate outlook, telling a conference in Canberra:
"It is likely that growth over the next couple of years will be a bit stronger than it has been recently. The pick-up in the global economy is helping us. The return of mining investment to more normal levels is almost complete. Monetary policy continues to provide support and survey-based measures of business conditions have improved noticeably. Employment growth has also strengthened over recent months. These are all positive developments.”
And while Moody’s wouldn’t disagree with that assessment, Dr Lowe (and Moody’s as it explained in its statement) sees hurdles (or “headwinds”) to that optimism.
"Households are gradually coming to grips with slower growth in their real incomes. Growth in wages is unusually low, average hours worked have declined and the nature of employment is changing. So there is a recalibration of expectations going on. Many households are also coming to grips with higher debt levels and, in our largest cities, high housing prices. We need to watch these issues carefully. Australia’s longer-term prospects remain positive, but we need to keep working to keep them that way,” according to Dr Lowe.
Moody’s (which is less political in its commentary, unlike rival Standard & Poor’s) has a similar view – for the next few years at least – as it explained in its statement explaining why it cut the credit ratings of all major Australian banks – including the big four – CBA, ANZ, NAB and Westpac:
“The rise in household indebtedness comes against the backdrop of low wage growth and structural changes in the labour market, which have led to rising levels of underemployment….The household sector’s resilience to weaker employment levels and/or rising interest rates has materially reduced. Any increase in household sector stress would have the potential to weaken consumer confidence and consumption, creating negative second and third order impacts on overall economic activity and, accordingly, bank balance sheets.”
Dr Lowe though, in agreeing with Moody’s from afar (in fact he has been warning now for months of the dangers weak income and wages growth and rising household debt will have on growth generally) went further, pointing to the political hurdles in the way of tackling this weak outlook. In fact he pinned some of the blame on the increasingly partisan political set up in Australia that seems incapable to discussing problems like this and tackling them.
"It is important that we have a sharp focus on the reforms that can make a real difference to our living standards. If we don’t do this, we will fall behind. The positive news is that there is no shortage of good ideas here. The not-so-positive news is that there is a shortage of good ideas that can successfully navigate the political process.”
And this means that for the Australian economy and population as a whole we potentially face more of what we have seen in the past few years – sub-trend economic growth, weak wages and income, rising debt and sluggish employment
"As things currently stand, it looks likely that average growth in per capita incomes over the next quarter of a century will be lower than over the past quarter of a century. We should, though, be capable of stronger growth than we have seen over the past few years. But we can’t take this for granted.”
And has implications for every domestic sector of the economy – from media, to retailing, health care, education, services of all sorts. If consumers have less money, and falling savings (as they are with the national savings ratio dropping), corporate revenues and profits will come under pressure, in in turn so will super fund returns and savings (and share prices overtime).
Dr Lowe is warning that next next quarter century will see economic and business conditions tougher than we have seen over the past few years. Think about that! And Dr Lowe implicitly took aim at the current debate about spending on school and tertiary education:
"As we search for the reforms that will make a difference, we need to be aware that the drivers of growth in our economy are changing. Natural resources remain our main export earner, but Australians are increasingly employed in service industries. Right across the spectrum, competitive advantage is increasingly built on technology and management capability.
"This trend is not going to go away and we need to capitalise on it. There is no magic solution. But, as I said before, the central ingredient lies in investment in human capital. If we are to grow strongly in the future, then that growth will be built just as much on the quality of our ideas as it is on the quality of our natural resources.”
And in a week where the government’s new funding plans for schools seems under siege – Dr Lowe’s observations are spot on.
It wasn’t in Moody’s remit to go as far as Dr Lowe did in its ratings downgrade statement on Monday night, but they were talking about the same issue, just from different directions:
“the very high level of household sector indebtedness will take a considerable period of time to unwind….The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness,” Moody’s said.
That’s a threat to keep in mind as analysts and investors fret about the arrival of Amazon and other second ranking issues.
