In my last blog I suggested listening to less news and true to my word I have been ‘restricting’ myself to the morning news only – maybe the papers on the weekend…
Thankfully the US elections have been crowding a little Covid information off the front page, though nothing really impressive to see there.
Two stats I will share with you that surprised me. Queensland has not had a Covid19 case in ICU since 19th June and not had a death from Covid19 since the 18th of April.
So more importantly, debt and yes we all own it!
Not all debt is bad. Good debt could be defined as governments borrowing money to build hospitals, roads, dams, railways and infrastructure, which generate jobs and is a lasting benefit to the community. In contrast, low quality government debt could be described as financing spending which produces little or no net benefit to society.
Obviously in the middle of Australia’s first recession in the past three decades, debt is funding a large portion of the economy. While spending on programs like JobSeeker and JobKeeper may sound like low quality debt as they are cash payments and produce no long-term national benefit, it could still be considered as a good choice. Sustaining household income is critical when the official unemployment is hitting 21 year highs of 7%. The problem is the size of the Federal Government’s Cov-19 spending programs is ultimately unsustainable over the medium term.
The diagram below shows how Australian households have been impacted and how the various support components have helped in replacing that big area of lost wages ($17b). You can see that the government support has helped but some heavy lifting has been done through the early release of superannuation which are really personal savings.
In July the Treasurer presented a $185bil budget deficit for 2020-2021 which is a post-World War 2 high. Despite the massive spending increase, it was quickly waved through Parliament. But is rising debt a worry?
One good measure of a country’s debt sustainability is its ‘Debt to Gross Domestic Product ratio’, now forecast to hit 50% by the end of this year as shown in the chart below.
You can see we had very little debt prior the GFC, and while our ratio is not bad compared to many other Westernised economies, its rapid growth was a problem well before this pandemic.
So who are we borrowing from?
To fund any deficit, the Australian Government must issue bonds and a large portion of these are normally purchased by our large banks, domestic wealth funds (such as the Future Fund) and local fund managers. The remainder are purchased by foreign investors in Asia, the US and Europe who can be anything from a foreign bank, sovereign wealth fund, global pension fund or a regional central bank. They expect us to pay them back.
The RBA is buying bonds but unlike many countries, to date, it is doing it using cash reserves. Other countries have had to resort to having their central banks print money. The government will now be regularly issuing bonds to fund this huge deficit and the RBA will need to buy any bonds not purchased by the above buyers and sometimes in competition with them, to keep the yields at the level they want.
- When cash reserves run out – the printing begins.
The RBA has told the market that it will keep government bond yields out to 3 years at the same level as the overnight cash rate (0.25%). This mainly becomes a problem if we see inflation and bond yields start to rise. The RBA would then have to step in and buy a lot more to keep the yields down.
Keeping rates low may not be a problem as, scarily, 90% of nations are in recession.
All major central banks rates are 0%, so any yield differential is very minor. Helping us is the price of Australia’s largest export, namely iron ore. It has risen 50% since the April low, meaning we are running a large trade surplus. So the impact of the Covid19 crisis and the policy response is that despite a large rise in debt, Australian bonds are still AAA rated by all three major rating agencies. Our interest rates remain low and the currency is back above 70 US cents. This combination helps provide a solid foundation for our recovery in FY21 and beyond. But how Australia pays our ballooning government debt off, is a conversation perhaps for next year, after we have successfully navigated the economic slow-down.
Do we have good news this week?
Europe is looking relatively healthy. The UK has seen very solid increases in spending and the Consumer Price Index actually rose 1% year on year. This would suggest spending is back on the rise and improvements in consumer confidence. Packaged holidays and camping equipment have seen the biggest rises in demand. UK Brexit negotiations are continuing with British truckers the latest hurdle. There are a lot more details to be agreed in this separation and this will probably take years.
Japan and China are still recovering quite well and as our largest trading partners, that is a good thing.
Closer to home over 50% of those people in Australia who lost their jobs due to the pandemic are back in the labour force. Goodish news but a lot of work to do here and Victoria’s lock down certainly hurt our national numbers.
In Australia car sales have come off their June highs and in July sales were 12.9% down versus July 19. Given Victoria is 23.3% of Australia’s Gross Domestic Product, it would be hard to see this improving until they are well out of lockdown. Australian Car Sales July
Retail sales in Australia rose 3.3% in July 2020 and turnover was 12.2% higher than July 2019. Despite poor numbers out of Victoria (other than food) national household goods were 30% above the July 2019 levels. Lots of furniture, white goods and electrical goods being purchased with stimulus money. ABS Australian Retail Sales July.
Dwelling approvals are well down, especially through May (-15.8%) and June (-4.9%), however alterations and additions to existing residential buildings are up. It could just be the Gold Coast but getting a tradie at the moment seems very difficult? ABS July Property Stats
A fairly mixed bag for Australia but being an Island has certainly helped us.
That is it for this fortnight but I did see a readers comment in responses to the interstate rivalries the QLD, WA and SA Premiers are trying to stir up to justify border closures. The writer wanted to remind us that they are Australians living in Victoria, not Victorians living in Australia. When it comes to State of Origin, I am always a Queenslander but for all other things, I am only ever an Australian.