States stable but could do better: Moody's

·2-min read

Climate action, surging debt and trade ructions may pose long-term challenges for Australia's state governments but the outlook for 2022 looks robust.

Global ratings agency Moody's says in a report released on Monday that it expects underlying momentum to drive a broad-based economic recovery.

The immediate outlook for governments is "stable" on strengthening revenue, as expanding COVID-19 vaccine coverage allows Australia's borders to reopen.

But rising debt burdens pose a challenge for state governments, along with climate and social risks.

"An increased focus on environmental factors and net zero may pressure prices and financing of key commodity exports, denting royalty income," Moody's says.

Policies to meet net zero carbon emission commitments are expected to heighten credit risk and raise the cost of capital for carbon-intensive sectors - tricky when iron ore, coal and gas are the top three exports.

Disclosure around climate issues, as regulators and firms reset the way of doing business, will also be key.

A road map to net zero emissions by 2050 co-ordinated with the federal government could change the outlook to positive, Moody's says.

"The absence of a coherent national approach to net zero over recent years has spurred states to develop their own approaches to reaching their 2050 targets - leading to divergent paths and limiting public funding available for carbon transition strategies."

Co-ordinated action would need to identify and invest in new industries as part of broader adaptation and mitigation strategies to manage increasing carbon transition risk.

Evidence of stronger fiscal resolve to get budgets back in the black would brighten the outlook.

A recovery in private investment would cut the reliance on public infrastructure as a driver of economic growth.

Moody's suggests renewable hydrogen and more development across the renewable energy sector, including micro-grids that link neighbourhood solar, will support new private investment.

States have effectively pushed peak debt levels out to 2025 and beyond with sustained public spending.

A further state government spending spree, weak offshore markets, stagnant wages and more trade woes with China will be the main drag on the outlook.

Supply chain disruptions and labour shortages will affect Australia and its key trading partners.

But Moody's says resilient agriculture and mining exports have offset COVID-19 disruption and provide a solid basis for recovery next year.

Consumer confidence is robust and will further support the rebound in 2022.

The unemployment rate is expected to have largely recovered to pre-Delta levels by the first quarter of 2022, with early signs of increasing wage pressure starting to emerge.

Housing prices and sales volumes will remain a strong revenue source for state coffers.

Increased housing building activity is expected to continue, as stimulus measures such as the $25,000 HomeBuilder grants, extends into calendar 2022.

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