Craig Michaels Director, Sovereign and Public Finance, Standard & Poor’s Ratings Services
Key points: • The Federal Government was placed on a negative AAA outlook by Standard & Poor’s in July 2016, which means that there is about a one in three chance of a ratings downgrade over the next year or two. • Commodity prices, wages and inflation, and the political process of budget repair are downside risks for the Commonwealth Budget. • Despite risks, Australia has strong and consistent institutions that help to foster investor confidence. I plan to give an overview of the economic landscape and, from a ratings agency perspective, how we see the Government’s fiscal environment. If I was to summarise that in one sentence, it would be that the economic environment is pretty good. The fiscal environment facing the Federal Government, in particular, is pretty weak and pretty tough. If you’re listening to the media, you probably have a fairly downbeat view about the Australian economy, but it is actually going pretty well. Economic activity, or what economists know as GDP, is growing at quite a robust rate of 3.3 per cent over the past 12 months. Now, when you think about the potential growth of the Australian economy, which most economists think is about 2.75 per cent, about 3.25 per cent is actually a pretty good outcome and all the more remarkable, I think, when you realise that we are still in the midst of the tremendous downturn in mining investment, which was the positive story of the economy a few years ago. Interestingly, the latest data is now starting to show very much the positive 90
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impacts on growth of the infrastructure spending that governments, particularly at state level, now have underway. Overall, I would say that the economic transition from mining investment–led growth years ago, to nonmining growth is happening pretty well. Yes, there are some soft patches, particularly in non-mining business investment, but you would have to say that, overall, it’s happening in a pretty good fashion. And it’s further evidence to us of Australia’s resilient and flexible economy, which we think is a big plus. The labour market, which people out in the street care more about, is also in reasonable shape. The unemployment rate is at 5.7 per cent. If you think about what’s realistically achievable, the lowest sustainable unemployment rate might be close to five per cent. There is some slack in the economy – there are some unemployed people who could be working and there are people who could be, or would like to be, working more than they are. But the unemployment rate has clearly peaked from its high mid last year of about 6.25 per cent. Based on the current set of data and a range of indicators, it will probably edge down a little bit further from where it is now over the next six months or so. Australia has a reasonably good, if not fantastic, labour market. But GDP is a concept, and it’s really a concept that only economists get excited about. Normal people care about incomes, I imagine. I think that’s true of individuals, it’s true of businesses, and it’s also true of governments. Despite the good economic growth that
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