US-China our big con­cern

But RBA un­fazed by hous­ing dip

Herald Sun - - BUSINESS DAILY - JOHN DAGGE THE ECON­OMY john.dagge@news.com.au

A RISE in trade ten­sions be­tween China and the US poses a grow­ing risk to the na­tion’s econ­omy, the Re­serve Bank has warned.

But Aus­tralia’s cen­tral bank is not fazed by the fall in house prices in Mel­bourne and Syd­ney nor is it wor­ried about the abil­ity of home­own­ers to re­pay their loans as in­ter­est rates rise.

The as­sess­ment was de­liv­ered in the RBA’s lat­est twice-yearly Fi­nan­cial Sta­bil­ity Re­view, re­leased yes­ter­day.

The health check on the na­tion’s fi­nan­cial sys­tem and econ­omy comes dur­ing a week in which global mar­kets were shaken by a sharp sell­down on Wall St.

“Down­side risks to growth have be­come more prom­i­nent since the previous re­view, par­tic­u­larly due to the rise in trade pro­tec­tion­ism,” the RBA re­port states.

While the fall­out from the trade war be­tween the world’s two big­gest economies had so far been “rel­a­tively modest”, it might not re­main the case, it states.

“If the im­po­si­tion of trade bar­ri­ers were to in­ten­sify, or if it ma­te­ri­ally af­fected busi­ness sen­ti­ment and de­ci­sions, the neg­a­tive im­pacts on eco­nomic growth could be more sig­nif­i­cant,” the RBA re­port said.

More than $90 bil­lion was stripped from the Aus­tralian share mar­ket this week in a rout trig­gered as US in­vestors re­assessed their ex­pec­ta­tions about the pace of in­ter­est rate rises in the world’s big­gest econ­omy and fret­ted about trade ten­sions with China.

The RBA pointed out the era of ul­tra-low in­ter­est rates spawned by the global fi­nan­cial cri­sis meant in­vestors had been will­ing to ac­cept more risk for less re­turn.

It cau­tioned that this could leave them ex­posed to un­ex­pected in­creases in in­ter­est rates or a global shock.

“With the price of risk so low, there is a height­ened pos­si­bil­ity that an in­crease in ex­pected or re­alised in­fla­tion or a neg­a­tive growth shock could re­sult in a sig­nif­i­cant and wide­spread rise in volatil­ity and repric­ing in fi­nan­cial as­sets,” the RBA re­port said.

“Some in­vestors may not be well pre­pared for such repric­ing, with the po­ten­tial for some large losses and re­ac­tive sales of as­sets.”

On the do­mes­tic front, the RBA said the slow­down in the hous­ing mar­ket trig­gered by tighter lend­ing stan­dards was a “pos­i­tive de­vel­op­ment” for fi­nan­cial sta­bil­ity.

While house­hold debt was high, home­own­ers were well placed to meet their re­pay­ments even as in­ter­est rates rose, it said.

“The ma­jor­ity of this debt is well se­cured, with only a small por­tion hav­ing a high loan-to­val­u­a­tion ra­tio,” the RBA said.

“Fur­ther, most of the debt is owed by house­holds that ap­pear well placed to re­pay the debt.”

ANZ head of Aus­tralian eco­nomics David Plank said the RBA had ex­pressed “a bit more cau­tion” about the global eco­nomic out­look but was com­fort­able with the hous­ing mar­ket.

“Over­all, the clear sense from the re­view is that the econ­omy is manag­ing the slow­down in the hous­ing mar­ket rel­a­tively well,” he said.

JP Mor­gan an­a­lyst Ben Jar­man said the re­view showed the RBA was “still quite san­guine” on the risk posed to the broader econ­omy by the na­tion’s hous­ing mar­ket.

“Some­what sur­pris­ingly, RBA an­a­lysts state that the risks of high house­hold debt ap­pear to be to the econ­omy, rather than be­ing a large risk to the fi­nan­cial sys­tem,” he said.

“Pre­sum­ably this is meant to im­ply that a fall in con­sump­tion in­duced by high house­hold debt would not cre­ate a sys­temic cri­sis.”

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