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Australia bank probe could cut 8% of finance, real estate jobs: JPMorgan

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JPMorgan thinks property prices will largely determine whether the main impact from the probe is felt through banks and financial stability, or via the more likely outcome of a consumption hit.

Sydney

AUSTRALIA'S banking probe could see job cuts in the finance and real estate sectors equivalent to losses during the 2008 global financial crisis, according to JPMorgan Chase & Co.

JPMorgan analysts led by Sally Auld see three main channels for the Royal Commission to exert influence on the Australian economy: tighter lending standards and slower credit growth; wealth effects through housing; and industry restructuring.

"The finance and real estate sectors now represent 12 per cent of gross domestic product," said Ms Auld, head of fixed income and currency strategy for Australia at JPMorgan, noting that both have been growing above their long-term trend.

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"So some consolidation seems likely. We think employment in these industries could contract by 8 per cent from peak to trough."

JPMorgan notes that the major eastern states are more highly leveraged to finance and real estate. Of all jobs in these sectors, 68 per cent are in New South Wales and Victoria. The industries respectively account for almost 7 per cent and 5 per cent of total employment in each state.

Meantime, with housing assets in Australia representing around 55 per cent of total household wealth, JPMorgan thinks property prices will largely determine whether the main impact from the probe is felt through banks and financial stability, or via the more likely outcome of a consumption hit.

"The extent to which this risk is realised will largely depend upon the magnitude of slowing in credit growth and the extent of house price declines," Ms Auld said, adding that in the event a policy response is required, there is scope for fiscal easing and lower interest rates. The latter "is likely to be less effective in a credit constrained economy, meaning that a lower currency becomes a necessary support to growth."

The Reserve Bank of Australia's cash rate is currently at a record low 1.5 per cent and the government budget is only edging back towards surplus, meaning they are unlikely to play the same supporting role as in 2008.

"We would caution that the macro-economic impact may take some time to reveal itself," Ms Auld said. "This means that a lack of evidence that the Royal Commission and greater regulatory scrutiny were having a macro impact thus far should not provide a false sense of security." BLOOMBERG

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