During discussions with clients, colleagues, and friends on the prospects for the economy going forward, the majority believe that we’re experiencing a temporary rebound, with some kind of fiscal cliff approaching in the first half of next year. I disagree, and here is why: 

• Interest rates were again reduced, to 0.10%. This provides support to consumers who are currently leveraged, through mortgages, business and/or investment loans, and provides an incentive to borrowers who want to grow their business, or simply invest. 
• Adding to this, APRA recently relaxed the responsible lending standards, making it easier for the banks to approve loan applications. 
• The Reserve Bank of Australia (RBA) has commenced a $100 billion quantitative easing (QE) program for the first time in Australia.   

What is QE? Simply speaking, the RBA purchases bonds, either from the Government, or the secondary market i.e major banks, at a cheap interest rate, allowing those corporate lenders to increase lending. The idea being that the money eventually makes its way back into the economy.  

There is a major concern that the debt levels of the government required to support the economy through COVID-19, via incentives such as job keeper and job seeker, will eventually come home to roost and land Australia in a deep hole (recession). This would occur if the only way to repay the debt was to decrease economic spending in essential areas, such as healthcare and education, and increase taxes. This is clearly counterintuitive given that in the latest federal budget, the Government is proposing to introduce greater spending in these areas to encourage economic growth. 

The key ‘ingredient’ to the Government’s ‘borrow to invest/grow’ strategy relates to our historically low-interest rates, which means that Australia can fund the interest payments from our economic revenue, or Gross Domestic Product (GDP). The strategy would unwind on two fronts, a) if interest-rate started to rise again, and b) if Australia’s GDP did not continue to grow on the back of the investment in our economy. 

The risk of rising interest rates is low, given the expectation of low-interest rates for years to come.  

With that said, Australia has the opportunity to grow our GDP, and therefore reduce the size of the debt as a percentage of GDP. 

When considering these factors, it’s hard to see how the economy is going to come crashing down, in fact, I see the next 12 to 18 months being a rather prosperous time for the Australian economy. 

Of course, my thoughts contained in this blog are predicated on the basis that we do not have major outbreaks of COVID-19 that forces major Australian economic cities back into lockdown. This is a risk we cannot ignore.