Economists warn SMEs would see impact on consumer confidence and Aussie dollar if US defaults on debt obligations

Economists warn consumer confidence is at risk of falling even further if the United States defaults on its debt, with lawmakers in Washington now at a stand-off on how to tackle the debt ceiling and slash trillions from the inflated federal budget.

However, economic experts also say that Australia’s economy will survive a default, even if the US credit rating suffers a downgrade, saying pressure on interest rates would be minimal and that demand would grow for Australian investments.

Another impact will be on the Australian dollar, experts warn, which will continue to rise if Australia is seen as a safe haven for investors.

“We’re looking at two things that could happen,” says AMP economist Shane Oliver. “Either they make a last-minute deal, or they can’t make an agreement and then default by the due date.”

“I think the initial impact would be a blow to confidence,” he says.

CommSec economist Craig James says while it’s hard to predict the impact of an unprecedented event, and notes the bank’s official position is that a US default won’t occur, he agrees that any short-term impact will be on consumer confidence.

“If something happens in the short-term perhaps it will be around the shock and uncertainty. I think the damage would be much more in terms of short-term volatility.”

With consumer confidence already falling, these economists say that any default might cause shoppers to save more. This would impact more on the retail sector, which is shrinking as consumers hold onto their cash.

And despite the small possibility of the US defaulting, Shane Oliver says there may not be enough time to satisfy Standard & Poor’s from keeping the United States’ credit rating from a downgrade.

“What might happen is that if a plan to slash spending doesn’t satisfy Standard & Poor’s, and therefore the American credit rating is downgraded, that would be taken negatively by worldwide markets.”

“When you’re in a credit downgrade, the cost of borrowing goes up, which could cause American bond markets to rise.”

ANZ’s senior rates strategist Tony Morriss says one major impact may be the increase in the Australian dollar, which may occur if investors start looking for safe havens. Already in the past 24 hours the dollar has risen to $US1.09c.

“You’re already seeing that Australia is a safer alternative. A higher dollar will have an impact on forcing ongoing further structural change, regarding exports relative to imports, tourism, retail and so on.”

“A default might close down debt markets and make it harder to borrow overseas. However, I think we’re less reliant on overseas capital markets than when we were in 2008.”

Shane Oliver agrees that a US default wouldn’t place upward pressure on rates.

“Australia might even benefit, as demand for bonds and the dollar rises.”

Craig James says with that in mind, businesses need to ensure they focus on long-term outcomes, rather than short-term volatility. He points to the fact the Australian economy is tied to Asia more than it is the United States, and says growth in the Asia-Pacific region will continue.

“Is China going to be prevented from growing? Or Asia as a whole? The United States will find a way to prevent a default, and life will go on.”

“This is much more a case of short-term volatility, and once this gets on the road, issues such as global economic recovery will be focused on again.”

James even says the pressure on the dollar won’t last for long.

“We think by the end of the year the dollar will be closer to $US1.04, and by this time next year, it’ll be closer to 95c.”