The Courier-Mail

WARN­ING ON DEBT BLOWOUT

UBS raises alarm on ‘shocks’ risk

- PAUL GILDER

AUS­TRALIA is in­creas­ingly gorg­ing on debt at a time when the econ­omy is grow­ing too slowly to keep the na­tion’s li­a­bil­i­ties in check, a global fi­nan­cial ser­vices heavy­weight has warned.

Al­ready fac­ing a sharp de­cline in the value of its ex­ports, the na­tion is plac­ing its trea­sured triple-A credit rat­ing at risk through its fail­ure to chip away at debt in re­cent years, Swiss bank­ing ti­tan UBS says.

In a re­port by econ­o­mists Ge­orge Thare­nou and Scott Haslem, UBS says Aus­tralia’s to­tal debt rel­a­tive to our an­nual eco­nomic out­put has surged to an all-time high.

The ra­tio of debt to the na­tion’s gross do­mes­tic prod­uct – a key mea­sure of a na­tion’s eco­nomic sta­bil­ity – shot up by 18 per­cent­age points to 249 per cent in the three months to June.

It means that for ev­ery $1 worth of goods and ser­vices pro­duced in Aus­tralia each year, the na­tion’s house­holds, busi­nesses and gov­ern­ments owe $2.50.

The na­tion’s to­tal debt pool, now at about $4 tril­lion, is ex­pand­ing by 10 per cent a year.

Aus­tralia now finds it­self in the same field as the Euro­pean Union and China on the met­ric, although well be­hind Ja­pan’s mind-bog­gling 400 per cent debt-to-GDP ra­tio.

Aus­tralia’s house­hold wealth is rock­et­ing thanks to boom­ing prop­erty prices and low in­ter­est rates, the UBS re­port says.

But that has also seen the house­hold sav­ings rate drop sharply in the past two years.

“When debt spikes too quickly, it raises the vul­ner­a­bil­ity of the real econ­omy to fu­ture as­set price and in­ter­est rate shocks,” Mr Thare­nou says in the re­port.

It comes as the Fed­eral Gov- ern­ment looks to cut spend­ing, and as busi­nesses also pare back their cap­i­tal ex­pen­di­ture.

Mr Thare­nou says the Re­serve Bank of Aus­tralia board, which meets to­day, is un­likely to lift in­ter­est rates for some time as a con­se­quence.

“With likely fis­cal con­sol­i­da­tion ahead, and a capex (cap­i­tal ex­pen­di­ture) cliff, these are key rea­sons why we ex­pect the cash rate to re­main at a record low for a sus­tained pe­riod.”

An­a­lysts widely ex­pect the RBA to leave the cash rate on hold at 2 per cent to­day.

Mr Thare­nou says rat­ings agency Stan­dard & Poor’s is still a chance to put Can­berra’s sta­ble credit out­look on neg­a­tive watch.

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