Credit quality under threat amid recession forecasts: S&P

S&P Global Ratings has reported a rise in over 30-day delinquencies underlying Australia’s prime residential mortgage portfolio, up from 1.28 per cent in December to 1.36 per cent in January.

The ratings agency noted that arrears typically rise in January, reflecting the end of the Christmas season and the peak of summer holidays.

However, S&P stated that it expects a “uniform nationwide increase” in delinquencies over the coming months in response to the economic fallout from the coronavirus (COVID-19) outbreak.  

According to S&P, a virus-induced decline in business activity would trigger an increase in unemployment and intensify mortgage serviceability pressures.  

“We expect arrears to rise in coming months as the transmission effects of COVID-19 ripple through the broader economy,” S&P noted.

“Pressure on employment is likely to surface in many sectors, particularly tourism and the broader services sector.”

The analysts added that, despite government efforts to support the business community, self-employed borrowers would be hardest hit by the downturn.  

“Cash flow pressures are likely to surface in the coming weeks for many self-employed borrowers as reduced demand for services and delays in receiving supplies take effect,” S&P stated.

“Targeted fiscal measures to help businesses will help, but we expect debt-serviceability pressures to surface for many self-employed borrowers, particularly those who operate in the tourism, leisure and hospitality sectors.”

According to research from credit data and analytics firm illion, approximately 37 per cent of home owners hold mortgage debt totalling approximately $2.1 billion across 6 million properties.

S&P’s forecast for credit quality come amid growing expectations among market analysts of a recession.

In an analysis released earlier this week, Westpac chief economist Bill Evans and senior economist Andrew Hanlan said the federal government’s $17.6 billion stimulus package would not be enough to prevent the domestic economy from slipping into a “technical recession” – two consecutive quarters of negative GDP growth.

“Our analysis of the package suggests that the initiatives are only likely to offset the contraction in the June quarter that we had estimated earlier in the week rather than lift growth into positive territory,” the analysis read.

“However, the current domestic and global environment has deteriorated more rapidly than we had expected. The downside risks to our central case forecast that we envisaged earlier in the week are now materialising.

“For us, despite the government’s bold efforts, the June quarter is still likely to show negative growth and Australia will experience a technical recession.”

ANZ Research has expressed a similar sentiment, with senior economists Felicity Emmett and Catherine Birch forecasting a 2 per cent quarter-on-quarter fall in GDP growth in the three months to June, and a 1.9 per cent contraction in the year to December 2020.

The ANZ economists have predicted that subdued economic activity would likely trigger a sharp increase in the unemployment rate (currently 5.1 per cent), which they said could hit 7.8 per cent by year’s end.

“Policy stimulus will help, but it won’t be able to offset the demand loss that will come from social distancing and widespread closures,” the analyst stated.

The economists added that the outlook is “more uncertain than usual”, warning that a longer or wider-spread disruption could result in a “deeper drop in activity and a sharper rise in unemployment”.

The Reserve Bank of Australia is set to announce “further policy measures to support the Australian economy” later today, with some analysts expecting the central bank to pre-emptively cut the cash rate ahead of its regular meeting in April.

[Related: Economists predicting emergency rate cut this week]