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?
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.