MYEFO: Is Australia headed for recession?

The Australian government has released its Mid-Year Economic and Fiscal Outlook (MYEFO) update with the deficit narrowing to $36.5 billion, from the $37.1 billion tipped in May.

In May, the government expected the Australian budget to hit a $37.1 billion deficit this financial year and forecast a balanced budget by 2020/2021. Today, it upheld its budget forecast.

Since the beginning of the year, prices of key export commodities such as iron ore, coal and copper have rallied. For example, Australian thermal coal prices have rallied 100% in 2016.

Indeed, today’s seemingly positive announcement follows a larger-than-expected 0.5% fall in Australia’s gross domestic product (GDP) in the September quarter.

Credit Watch

Following today’s announcement, commentators were worried that Australia’s sterling triple-A credit rating would be at risk. Given the current policies and forecasts, a number of economists believe the three major credit ratings agencies, including Standard & Poor’s (S&P), Moody’s and Fitch, will downgrade our country’s creditworthiness.

While a decision from the agencies is not expected until next year, if it comes it would be the first downgrade to Australia’s rating for almost 30 years. S&P and Moody’s for instance have held Australian debt in the highest regard since the early 2000’s, while Fitch followed its peers by upping its rating on government debt to AAA in late 2011.

However, in June 2016, S&P set its outlook for Australia as ‘negative’ according to Trading Economics . It followed by putting Australia’s banks on notice as it cited high debt levels in the private sector.

The implications of higher credit ratings mean Australia’s debt could become more expensive to issue. The flow-through effects means banks such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and  Australia and New Zealand Banking Group (ASX: ANZ) could also be assigned lower ratings.

The good news for consumers is that a lower credit rating would be unlikely to impact your mortgage repayments. Plus, the major Australian banks have an implicit guarantee from the government. Indeed, the government is unlikely to let any of the major banks fail.

Foolish Takeaway

It is easy to get caught in the seemingly endless stream of economic and share market news. However, at the end of the day if you are a shareholder in a company you are a part owner of a business.

In my opinion, if you think about yourself as a business owner, rather than a ‘stockholder’, you are far more likely to succeed in investing because you will be able to put aside the ‘noise’ and focus on the important things.

Heck, even if we enter a recession I’ll be investing in my future by buying shares in great companies trading at discounted prices.

Heck, even if we enter a recession I'll be investing in my future by buying shares in great companies trading at discounted prices.


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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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