ASX enters bear market; S&P says recession is likely

ASX enters bear market; S&P says recession is likely

S&P Global Ratings says Australia’s ratings are not under immediate threat despite saying a recession was like ‘likely’.

Here’s part of their statement:

S&P Global Ratings today said that its ratings on Australia (AAA/Stable/A-1+) are not under immediate threat from the now likely technical recession and the fiscal cost of the government’s imminent stimulus package following the outbreak of COVID-19. The ongoing coronavirus outbreak comes on the back of climate-related events such as major bushfires and storms on the east coast of Australia.

We believe the ‘AAA’ rating on Australia can weather a temporary economic shock. Although COVID-19 is hitting the Australian economy and government finances, rating stability is anchored in our expectation that the global outbreak will subside during the second quarter of 2020 and that the economy will bounce back shortly after. Further, the country’s strong fiscal position has provided it with some room to maneuver at the current rating. Nevertheless, tolerance for further weakening at the ‘AAA’ rating level is diminishing, and the rating could come under pressure if weak economic conditions are more prolonged than we currently expect.

We believe Australia’s economy will move into recession by June 2020, and grow just 1.2% in 2020 before rebounding. This is the weakest economic outlook in 20 years and means the COVID-19 outbreak would be a greater economic shock to Australia than the global financial crisis, when growth fell to 1.6% in 2008. With our forecast that China’s GDP growth will slow to 4.8% in 2020, we don’t expect Chinese demand to provide the same level of support to the Australian economy as it did in 2008. We have recently revised our forecasts because the COVID-19 outbreak continues to spread beyond our initial expectations. We now forecast that real GDP growth in Australia during calendar year 2020 will be 1 percentage point lower than our base case before the COVID-19 outbreak–that is, a cut by a further 0.5% on top of February’s 0.5% revision. We predict contractions in the first two quarters of 2020: this would be the first technical recession since 1991.

All signs are pointing toward a period of soft economic conditions. The global economy is slowing, consumer and business sentiment continues to decline, tourism and education exports are suffering from travel restrictions, and consumption remains weak. Meanwhile, global stock markets including Australia’s have fallen sharply, and the Australian government’s 10-year bond yields have fallen to record lows this week. We believe unemployment and underemployment will rise, making it more difficult for the Reserve Bank of Australia to achieve its inflation target.

While there continues to be high uncertainty about the rate of spread and timing of the peak of the COVID-19 disease, modeling by academics with expertise in epidemiology indicates a likely range for the peak of up to June 2020. Our economic and credit views reflect our assumption that the global outbreak will subside during the second quarter of 2020.

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