Australia Poorly Placed for Next Global Downturn, Deutsche Says

(Bloomberg) -- Australia is poorly placed to respond to a global slowdown that’s probably not too far off given the duration of the U.S. economic upswing, says Deutsche Bank AG.

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

Deutsche estimates that a global recession in mid-2020 would find Australia with a budget barely in surplus, net debt around 17 percent of gross domestic product and the cash rate at about 2.25 percent. In contrast, at the time of the 2008 financial crisis, the budget surplus was 1.8 percent of GDP, net debt was zero and interest rates were at 7.25 percent.

One solution would be to strengthen the economy’s buffers more quickly. But lifting rates prematurely from a record-low 1.5 percent 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 estimates at 3.25 percent. 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 aging population.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke

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