Economists laud stimulus plan but AAA rating at risk

Economists laud stimulus plan but AAA rating at risk

“Part of the trade-off around length of payment may have been a flat rate, rather than percentage of income as per other global models. There is, however, merit in the length of this scheme which likely reflects the realities of this downturn including an extended duration,” she said.

The economy desperately needs this new package, which is the third stimulus plan announced by the government since the virus outbreak and brings total stimulus close to 10 per cent of GDP at $213 billion.

Job losses continue to climb alarmingly, especially in the retail and hospitality sectors, which are the most exposed to the government’s policy of encouraging people to stay at home and limits on social gatherings.

“We expect a front loading of job shedding in the next few months with the unemployment rate set to test 9.5 per cent to 10 per cent by the third quarter, or possibly earlier,” said Ms Ong at RBC. “[Monday’s] package may temper this rise.”

A deep recession is underway in Australia, agreed NAB’s economists. NAB estimates that unemployment could reach 12 per cent by mid year given the extent of the shock to the economy.

“The exact path of both GDP and unemployment will very much depend on how long it takes to bring the virus under control and the success of government health and economic measures,” NAB added.

“The aggressive easing of fiscal and monetary policy will provide significant support for the economy in recovery, but likely cannot entirely offset the very large near-term shock from the pandemic.”

Economists are also trying to work out how the stimulus measures will be paid for.

“There is little doubt that the blowout in public debt will mean a higher tax burden further down the line. In addition, our fixed income strategists today noted that there is a very good chance that Australia’s sovereign AAA credit rating will now be lost,” Mr Aird said.

Prashant Newnaha at TD Securities is expecting to see a government bond issuance program of between $250 billion and $300 billion, or roughly three times gross issuance in 2016-17.

“The RBA is likely to soak up this issuance in the secondary market, but no matter which way you cut it, record ACGB issuance is at hand,” the strategist said. This “is likely to drive renewed speculation that Australia could lose its AAA rating” after Fitch downgraded the UK to AA- last week.

But Martin Petch, vice president at Moody’s Investors Service, said the third package should help to partly offset the negative impact of the coronavirus outbreak on growth given its focus on employment.

“The impact on Australia’s fiscal strengths due to the downturn and the fiscal response should be limited given Australia’s ongoing commitment to fiscal consolidation over the medium term.”

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