Australia poorly placed for next global downturn, says Deutsche Bank


SYDNEY • Australia is poorly placed to respond to a global slowdown that’s probably not too far off given the duration of the US economic upswing, said Deutsche Bank AG.

“The US Federal Reserve doesn’t typically manage to engineer a soft landing once the unemployment rate has fallen through full employment,” Deutsche Bank said in a research report yesterday, noting the US is likely past that point with a jobless rate at just 3.9%. “So, the next global downturn is more likely to be a matter of when, not if.”

Deutsche Bank estimates that a global recession in mid-2020 would find Australia with a budget barely in surplus, net debt around 17% of gross domestic product (GDP) and the cash rate at about 2.25%.

In contrast, at the time of the 2008 financial crisis, the budget surplus was 1.8% of GDP, net debt was zero and interest rates were at 7.25%.

One solution would be to strengthen the economy’s buffers more quickly. But lifting rates prematurely from a record-low 1.5% would slow the economy and could spark a sharp housing correction.

The government could also push the budget back into surplus earlier, but that would similarly weaken growth and deprive households of proposed tax cuts that should lend support to consumption.

At the heart of the problem is the lower neutral interest rate — the level at which monetary policy neither stimulates or cools the economy — which Deutsche Bank estimates at 3.25%. That suggests less policy ammunition will be available to ward off downturns, as well as lower investment returns — which could prove to be a costly problem for a country relying on superannuation to support an ageing population.

Meanwhile, Australia’s banking probe could see job cuts in the finance and real estate sectors equivalent to losses during the 2008 global financial crisis, according to JPMorgan Chase & Co.

JPMorgan analysts led by Sally Auld see three main channels for the Royal Commission to exert influence on the Australian economy: Tighter lending standards and slower credit growth; wealth effects through housing; and industry restructuring.

“The finance and real estate sectors now represent 12% of GDP,” said Auld, head of fixed-income and currency strategy for Australia at JPMorgan, noting both have been growing above their long-term trend. “So, some consolidation seems likely. We think employment in these industries could contract by 8% from peak to trough.”

JPMorgan notes the major eastern states are more highly leveraged to finance and real estate.