Moody’s just gave Australia’s financial system a pretty extensive character assessment as it decided to downgrade the credit ratings of 12 lenders, including the four major banks.
It lowered its rating on the strength of the economy, noted there have been “latent” risks building because of surging property prices in major cities, leading to a surge in household indebtedness all against a backdrop of low wages growth.
None of this is startlingly new, of course. Taking just one example, RBA governor Phil Lowe recently referred to the high levels of household debt and the likelihood that it will act as a brake on household spending. Here’s a chart he used at the time.
This has left Australia vulnerable, he said.
Moody’s agrees, and its observation is that Australia has found itself in an unprecedented scenario, implying that it is difficult to judge how deep and wide the effects of an economic downturn might be. It says (emphasis added):
Australia … exhibits very high levels of household debt, with the ratio of household debt to disposable income rising to 188.7% at end-2016. This situation is particularly concerning, against the backdrop of low nominal income growth experienced in Australia over the past few years. Whilst unemployment remains low — at 5.5% as at May 2017 — rising levels of underemployment indicate spare capacity within the labor market, which could constrain wage growth over the medium term.
The household sector’s resilience to weaker employment levels and/or rising interest rates has materially reduced. Any increase in household sector stress would have the potential to weaken consumer confidence and consumption, creating negative second and third order impacts on overall economic activity and, accordingly, bank balance sheets.
The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness.
Moody’s also points out that while the banks are likely to continue to strengthen the resilience of their balance sheets, “the very high level of household sector indebtedness will take a considerable period of time to unwind.”
- we could be living in this uneasy scenario for quite some time, and
- weak levels of consumer confidence have the potential to create “negative second and third order impacts”.
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