You may recall post-GFC, Australians tightened their belts and reverted back to the savings habits of former generations, becoming far more frugal. Less than a decade on however, it would appear we have lost interest in a rainy day cash reserve. Or have we?
Economists are sounding the alarm bells, as Australian household budgets shift to a concerning dynamic of declining savings and spending habits.
According to new research from Morgan Stanley, 38 per cent of mortgage holders failed to add any additional funds to their ‘piggy bank’ last year, and 14 per cent spent more money than they made.
Most concerning perhaps, is the surprise outcome from the survey that suggests non-investor, interest-only borrowers are saving even less, even though their mortgage repayments are significantly lower (40 per cent on average) – than property owners making principal and interest repayments.
“This gap is most pronounced for owner-occupiers, where 52 per cent on interest only are not saving versus 36 per cent on principal and interest,” said Morgan Stanley analyst, Richard Wiles.
So why are less of us preparing for that inevitable ‘rainy day’? Particularly given we have become acclimatised to a very low interest rate environment that could change at any given moment?
NAB’s chief economist Alan Olster says it’s a simple case of scarcity; “After you pay your mortgage, after you pay your utilities, transport, all that sort of stuff, you don’t have a lot left and you’re not inclined to go out and spend a great deal on things you don’t necessarily need,” he told Domain. “That’s what’s really happening.”
It’s simple mathematics really. The mortgage needs to be paid and the lights need to be kept on. But in the wake of ever-rising cost of living, including utility bills, combined with stalled wages growth, where does the additional funding come from to shop for luxury items and squirrel away any extra cash?
“Our survey points to a slowdown in deposit growth, while our Macro+ team believes that households face the twin challenge of higher household expenses and rising mortgage rates,” said Wiles.
“Combined with falling incomes, cost of living inflation and credit rationing, our Macro+ team expects consumer spending to slow down.”
The bigger picture problem
It might seem that we’re all doing the right thing to pull in the purse strings on our retail spending habits. The concern however, is that consumer spending has been on a mostly downward trajectory for almost two years now, with a marked deceleration over the last three months.
Oster says, “What matters is underutilisation of labour. That’s really important. You’ve got low productivity, which means people aren’t prepared to give wage increases in that sort of environment, you’ve got inflationary expectations that are not high. You can explain a lot of the reduction in wages using these combinations.”
And of course projections for the next six to twelve months around these inhibiting factors are not all that optimistic.
In fact Morgan Stanley analysts note, “a weaker domestic economic cycle, re-emerging headwinds to margins, fundamental change in the mortgage market, increased political and regulatory scrutiny, and an increase in non-housing loss rates.”
Hence, even as our unemployment figures fell to a four year low of 5.5 per cent in September (with an additional 19,800 jobs), long term optimism is still waning alongside sluggish wage growth, which has been sitting at or below the cost of living for years now at an average 1.9 per cent.
Another issue in taking these unemployment figures at face value is that while it appears more positions are being created, they’re not necessarily the stable, long-term opportunities that see people confident in their capacity to save and spend their earnings.
In fact, a new report by the Salvation Army using data extracted from their financial counselling service shows that the number of casual and part-time workers seeking support has increased by 140 per cent over a 12-year period, outstripping all other client groups.
So yes, more people might have “jobs”, but they’re not necessarily the kind that consistently keep food on the table and the bills paid.
Head of the Salvation Army’s Moneycare service Tony Devlin says, “The cross-section of clients is growing, and the amount of debt people are finding themselves in is very high.
“Over the last ten years, we have seen major changes to the employment landscape in conjunction with increases to the cost of living. This makes it harder for people to keep their heads above water.”
According to the Australian Bureau of Statistics there are currently 1.1 million Australians classified as “underemployed”, up from 170,000 in the 1970s, as the so-called “gig economy” takes off with increased services requiring casual and part time resourcing, such as Uber, Airtasker and Deliveroo.
The Salvation Army’s analysis found Moneycare clients owed $2.55 for every dollar earned, with more and more Aussies falling into a vicious debt cycle due to financial desperation. As Devlin points out however, “these band-aid solutions (credit cards and consumer leases) typically only exasperate the problem.”
These less than favourable economic tidings will no doubt be a continued factor in the Reserve Bank’s measure of whether interest rates should sit tight, or move upward over coming months. Particularly as we head into the traditionally busier Christmas retail period where consumer spending will be closely monitored.