One of the interesting things going on with the Australian economy right now, is that we're still waiting for consumers to come to the party.
We're still crouching behind the living room couches, in the dark, underneath a shiny plastic sign that says ‘SURPRISE!' But still, there's no sign of the consumers.
And we've been there for years now. We're starting to run out of chips.
So what's going on?
The popular economic narrative is that consumers got a little too high on debt in the run up to the GFC. And now we've all got a hangover.
Check out this graph here, from the RBA. The left panel shows the run up in household debt, as a percent of disposable income, that occurred through the 80s and 90s up to the GFC. It also shows the levelling off that's occurred since then.
As I've argued before this run up was mostly due to structural shifts in the financial system – financial deregulation, a low inflation environment and so on. Ok, maybe some of it was due to households getting a bit carried away – but not much.
And that's why we haven't seen a drastic correction back to a Michael J. Fox future of the 80s – not like some scare mongers were arguing. Steve Keen, I'm looking at you…
Now, since the GFC, it's levelled off. And it's not clear where it will go from here. It might go nowhere. There's nothing in economic theory to suggest that it should be one level or another. It just is.
But if it's going nowhere, that doesn't mean that nothing's happening. Because if households aren't taking on more debt, and their earning more and more money (which they are, because wages are still growing), then they must be paying down the debt that they have.
Have a look at that chart again, but look at the right hand side panel. That shows the amount of interest that households are paying, as a percent of disposable income.
It has come off quite sharply since the GFC, and is now back around where it was in 2002 and 2003.
There are two things driving this. In large part it's the string of interest rate reductions we've seen since 2011. But it also reflects households eating into their principals.
And it is definitely true that households are saving more these days. Check out this graph, again from the RBA:
The Household saving ratio has picked up sharply. After flirting with negative territory in 2002, it's now at the highest level since the mid 80s. Households are stashing more and more of their income under the bed.
And that's important for our economic story, because it means that they're not out there shopping or expanding their asset portfolios. And it's these things that are a key ingredient to any economic recovery.
It's hard to get by without them really.
And so we're still waiting in the dark, thinking no one will notice if I take just one chip.
But the puzzle for economists right now is why are we still waiting? Where are they? And Glenn ‘gun-happy' Stevens must be wondering what he's got to do. If interest rates at 50-year lows won't pull consumers out from their holes, what will?
Because it is definitely true that households are in a much-improved position these days.
Households should be feeling wealthier. Over the past year or so there's been a clear pick up in household net worth – again, another chart from the RBA:
Household net worth has been picking up solidly over the last year or so. This has largely been driven by a pick up in financial assets (stocks etc), with little momentum coming from property assets so far – though the recent pick up in house prices should help this in the near future.
And at the same time as wealth has been increasing, incomes and wages have also been growing.
But still consumers chose to sit on their hands. And there's evidence that every time rates are cut, many households hold their repayments fixed, and use the rate cut to eat a bit further into their principal.
But at some point, consumers will decide that enough is enough, and they'll unstitch those wallets. They'll decide that they're happy again with their balance sheets, and with a wad of cash under the bed, they'll be ready to launch back in if they want to.
Consumers wait, like a tightly coiled spring.
And when they finally come to the party, they'll give the economy a big boost.
But we just don't know when that will be. I think that it will have to be soon, but to understand why we're still waiting to get this party started, we need to know why consumers are holding out.
And if it's not wealth, and it's not incomes and it's not the labour market, what is it?
Confidence.
It's seems that Aussie consumers still have the heebie-jeebies.
I've written about this more than once. But it still seems to be the biggest challenge we've got right now.
Maybe once we get the election out the way it might fix it. Not that the election will probably change all that much either way, but there's a herd mentality at play. If enough consumers decide that things are looking rosy again, then that will be the reality.
And history has shown that consumers can turn on a dime. When the herd turns, it can turn quickly.
And so from here, there seem to be two options. One, consumers remain on the sidelines and we continue plodding along at around trend.
Or two, consumers come to the party, the champagne starts flowing, and their accumulated savings drive splurge on small and big ticket items.
I'd have to think that the latter is more likely than the former. And I'd say that a surge in consumer spending might be much closer than we think.
But confidence is still the signal to watch.
ANNE says
I think consumers are not only lacking confidence, but are actually fearfull. And we know how fear can affect the herd…..Which of course is the time for the informed to act, by using logic instead of emotion…sometimes not easy. Ever been the first to jump in the pool on a cool day? After the initial, perceived shock, you feel quite warm, while your friends are still shivering and fearful on the side of the pool….
Geoff Wallace says
I have to agree to a certain level. However, the shock and awe campaign of the Labor puppet of the unions has left the business sector in a sad state. Not only mums and dads but the owners of small to medium sized businesses have been badly mauled and this has flowed on to the mums and dads and is why confidence is low. My view is that you need to lift the spirit of the small to medium business owners and they will then start to spend (employ people, give pay rises etc and start talking positive) and then confidence will slowly reemerge in the markets. Quite simply, small to medium business employs the majority of workers in Australia – the canary in the mine!
adam says
i think australians are becoming smarter… they have a want and desire to pay off their homes earlier and will delay paying for things they dont need. with technology changing every year or two, they are simply not needing to upgrade gadgets in order to get a 1mp better camera quality or whatever. car sales would indicate that people are still buying the luxury items. but everyone now has a flat screen tv, they don’t need another one even if it is cheaper. the market is saturated like a flooded grassed area. you can keep watering the grass but theres no benefit as it all runs off.
Mike says
Government needs to think wisely to help this economy get better, put out some money as it comes back to you anyway, give every family or every ABN holder or both a $1,000. Knock stamp duty on the head for 6 or 12 months with 50% discount after this.
Give back first home buyer grants for established homes.
Get the economy going and once the good signs are back then slow it a little, but don’t kick everyone in the guts while the economy is Down or it will take a while to get all us sick fukcs back up, like it has over the last few years.
RBA needs to do .50% reduction next week, give everyone a good boost at once, don’t drip feed or more will fall, give it a good power kick at once and watch the economy spring into life.
We need two or three things to happen at once and then the party will start.
judy browning says
I think people just realised they don’t need it, all that stuff. It didn’t make them happy, they just had to work harder & longer to pay for it all. Now we have worked out what we really need & what makes us happy. More time with our children & friends, more time for sport & gardening & home life. We are making the most of what we already have, we are renovating & painting our houses & working in our gardens & talking to our neighbours & we are becoming content. We don’t care about getting a bigger house & the fancy stuff & the stress & addiction of the more, more, mentality.
Colin Glover says
I sense Judy is somewhat right. The consumer has seen the light they don’t need another TV with all the wizz bang. Even Foxtel have recognised that the average consumer doesn’t want dud 3D. Who needs a 42 mg pixel camera phone when a 12 will do as good? Consumer lead recoveries are old hat. We need to help heal the planet and buy with our children’s children in mind.
We are surrounded with so much uncertainty maybe its best to pay down the debt and enjoy life more and help the planet recover a bit. Did you see that its forecast that some 1700 cities and towns in America could have > 25% inundation in the next couple of decades – due to the sea level rising and increased rainfall. If this be so what’s the number here, where and cost?
Enough of the doom and gloom lets go and have a good night out.
Clive says
A party? Who needs a party if it’s going to give you a monster hangover? Maybe people have just had enough of the boom & bust economic pattern and now a bit of stability is just fine. We have been fortunate to have avoided the worst of the GFC up to now but the people I’ve been talking to are well aware that there is still plenty of danger in the international economy and are naturally cautious. That’s a good thing, it’s about managing risk. Real economic growth is not brought about by printing money and devaluing the currency; you have to increase productivity and improve efficiency to increase revenue. The fundamentals of household money management can be extrapolated to the national economy: if you spend more than you earn you’re going to have more debt than you can afford to repay.
John says
It’s not just confidence around moves in the market that are affecting the herd. You can’t check the news, in any format, without hearing about another company folding or more people being made redundant. There is a lot of fear around job security. Geoff stated it in an earlier post, but it’s not just the Business sector. Education, particularly Universities, are slashing staff at the moment, the RBA itself is currently reviewing positions and readying to wield the redundancy axe. We are not out of it yet.
Tom says
Geoff Wallace says above, “I have to agree to a certain level. However, the shock and awe campaign of the Labor puppet of the unions has left the business sector in a sad state.”
He could just as realistically have said, “- – – However, the negative fear campaign of Mr Abbott has left the business sector in a sad state. ”
It is good to try to be politically impartial when looking at economics. In all aspects of life, we have to look at the big picture and keep all things in perspective. In pictures, the objects in the distance appear smaller. In life, the difficulties and triumphs of the distant past may appear insignificant. But Geoff can thank the sacrifices of workers in the past for his income being much higher than those of our Asian neighbours. Unfortunately, in our race to affluence, we have, to our detriment, lost the entrepreneurial spirit and the sense of community which still flourish in Asia and keep them living frugally within their means. Hopefully, the current attitude towards belt-tightening, which we see in Australian households, will auger well for our future social stability. A “Haves & Have-nots” situation invariably leads to disruption. This is why the philanthropic attitude of Jon & Dymphna should be loudly acknowledged from the rooftops. Showing us various ways of improving our family security will help procure a more even distribution of wealth in our community, leading to a more stable society.