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May 22, 2009 – 3:44PM

The warning that the United Kingdom may lose its top-tier, AAA credit rating is a stark reminder of what can happen when you start bailing out your banking system.

One of the world’s leading credit rating agencies – Standard & Poor’s – has put the UK on notice, placing a negative outlook on its rating due to its concern that the country’s debt could balloon even further as a proportion of gross domestic product (GDP).

“Even assuming additional fiscal tightening, the net general government debt burden could approach 100 per cent of GDP and remain near that level in the medium term,” S&P said on Thursday.

Thankfully, even without Australia’s banks being backed by a 100 per cent guarantee from the federal government, the big four – ANZ, Commonwealth Bank, National Australia Bank, and Westpac – are rated among the strongest in the world.

And whatever you thought of this month’s federal budget, the big three rating agencies – S&P, Moody’s and Fitch – were quick to say that Australia’s AAA rating is safe.

When you make the comparison between the UK and Australia you can see why.

While Prime Minister Kevin Rudd’s projection that public debt will reach 13.8 per cent of GDP by 2013/14 has sent collective shivers down the spine – as seen in this week’s drop in consumer sentiment – can it really be called a debt mountain?

The size of Australia’s economy or GDP was $1.1 trillion as of the December quarter.

Compare that to the UK’s GDP at 2.7 trillion pounds ($5.5 trillion), and the risk of a 100 per cent debt burden reaches Himalayan proportions.

Obviously, going from zero debt to a debt hillock in the space of 18 months under a Labor government has the federal opposition up in arms.

As we are repeatedly told – every man, woman and child is now saddled with $9000 of Labor debt.

But such is the hysteria, you would think a debt collector was about to knock on the front door demanding a contribution, which of course they aren’t.

But the political tussle over the debt mound is stretching to the ridiculous.

Mr Rudd, until Thursday, avoided using the words ”$300” and “billion” in the same sentence to describe Australia’s debt – the opposition was eager to get a sound clip of it for future election campaigning.

Oh please.

The other “D” word that has been rumbling since last week’s budget – has it really only been a week? – is the deficit.

Or more to the point, the budget deficit exit strategy.

It was left to Treasury Secretary Ken Henry to give an eloquent explanation of his department’s – and now the government’s – growth projections which will bring the budget bottom line back to surplus by 2015/16.

Whether or not you believe the economy will be running at a blistering 4 per cent-plus growth rate from 2011/12 as it accelerates out of a recession, there are still question marks over the short-term forecasts.

Is the Treasury/government, being too pessimistic in the near term?

The budget forecast growth to be flat in 2008/09, before contracting 0.5 per cent in 2009/10.

Macquarie Bank senior economist Brian Redican says when the budget is being framed, there is really no benefit from being overly optimistic in the short term.

“If they were, you would find out quite quickly, and they’ll just be really beaten over the head about it,” Mr Redican said.

Switching from the Hubble telescope looking for the potential growth in years to come, on June 3, we can look in the rear view mirror as to how the economy performed in the first three months of this year when the national accounts are released.

Up until now there has only been one quarter of negative growth in the December quarter – a 0.5 per cent contraction – and another negative in the March quarter will put us officially in recession under the normal definition.

That said, Reserve Bank of Australia Governor Glenn Stevens has already declared a recession, without even seeing the numbers.

But is it inevitable that it will be a negative number on June 3?

Mr Redican said there’s every reason to think that GDP numbers will be quite weak, but, equally, he wouldn’t be surprised at this stage to see anywhere between minus 1 per cent and plus 1 per cent on the day.

What is known so far is that consumer spending was positive in the March quarter, supported by the government’s cash handouts from its $42 billion stimulus package announced in February.

Another plus for the economy has been a surprisingly strong export performance, despite having to deal with a difficult global economy.

Also, business inventories – goods held in warehouses and on shelves – are statistically unlikely to plummet as they did in the December quarter.

“Given just those three factors your starting point is actually on the positive side,” Mr Redican said.

But other GDP components due for release in the run-up to June 3 – and other parts of the economy that aren’t known until the national accounts are released – could alter that dramatically.

Business surveys have indicated that manufacturing could be even weaker in the March quarter than in the December quarter, while business investment – which has been a major plank of support for the economy in recent years – is likely to see a large pull back in the March quarter.

Private new capital expenditure data is due for release next Thursday.

Commonwealth Bank chief economist Michael Blythe expects capital expenditure to have fallen 8 per cent in the March quarter, but said of more importance to the outlook will be investment intentions contained within the report.

The federal budget forecasts business investment falling by 18.5 per cent in 2009/10.

As of the December quarter, planned investment for 2009/10 was $79.87 billion, but to justify the budget forecasts, this would need to drop to $66.2 billion in Thursday’s reading.

“Such a fall would be the biggest in at least sixty years and would reduce GDP growth by 3.25 percentage points,” Mr Blythe said.

“So how the ‘capex’ story unfolds is crucial to determining the size of and duration of the recession.”

http://business.theage.com.au/business/australias-debt-mountain-pales-into-insignificance-20090522-bi10.html?page=-1

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