Australia’s Economic Reckoning Delayed as Loan Holiday Extended

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Australia’s big banks have just given the economy some breathing room.

The biggest lenders announced Wednesday they will grant hard-pressed borrowers a further four months before they have to start repaying their loans.

About 10% of mortgages and a further 15% of small business loans are currently on pause, and some 800,000 Australians would have seen such support withdrawn from the end of September without the extension.

Australia’s Economic Reckoning Delayed as Loan Holiday Extended

The government’s flagship wage subsidy package that’s keeping more than 3 million people in jobs is due to expire in September, posing a looming fiscal cliff for the economy. Treasurer Josh Frydenberg said Wednesday he would announce a “new phase” of income support when he hands down the government’s economic and fiscal update on July 23.

Both measures will support the nation’s tentative economic recovery, which is already threatened by a second wave of infections in Victoria state and a renewed six-week lockdown of the second-biggest city, Melbourne. Here is what the data shows about the challenges ahead:

1. Cliff edge softened

The government says it has injected A$260 billion in economic and financial stimulus. But it has consistently stressed that support cannot be open-ended. Today’s announcements suggest it will taper programs, rather than go cold turkey.

Australia’s Economic Reckoning Delayed as Loan Holiday Extended

2. Spending squeeze risk

Households and businesses will need to divert money from elsewhere to resume servicing debt unless incomes return to pre-pandemic levels.

While retail sales have bounced back since their nadir -- up 16.9% in May -- discretionary areas of spending like clothing are still in the doldrums.

When households have to begin making mortgage payments again -- remember the average mortgage is over A$500,000 -- such spending is likely to come under even more pressure. That’s not good news for already hard-pressed retailers.

Australia’s Economic Reckoning Delayed as Loan Holiday Extended

3. Pain postponed

It’s unclear how many businesses will be viable without the current levels of extraordinary support. The number of companies entering administration so far this calendar year is down and it’s expected this will spike once support measures are rolled back.

As firms fold, more jobs will be lost. Forecasters expect the jobless rate to reach 8% in the third quarter of this year, according to a Bloomberg survey.

Australia’s Economic Reckoning Delayed as Loan Holiday Extended

4. Cash cushion?

Bank deposits have progressively risen since the start of the crisis. What’s not clear is how that is distributed across households. Prior to Covid, only 40% of borrowers were six months or more ahead on repayments and 20% had no buffer, according to estimates from Morgan Stanley.

Australia’s Economic Reckoning Delayed as Loan Holiday Extended

5. Loan book health

Right now, the banks don’t know for sure how many of their customers are currently having salaries topped-up by government support and might be in future stress even if they are currently making repayments.

While job losses have been concentrated in areas like hospitality and retail, the wage subsidy program has supported people right up the income scale. Even in a sector such as IT, over 50,000 people are having at least part of their salary paid for by the government. Many of those will have home loans.

Australia’s Economic Reckoning Delayed as Loan Holiday Extended

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