Economic wrap

The RBA’s decision to leave the official cash rate on hold for the seventh consecutive month has done little to improve consumer confidence.

Data from the Australian Bureau of Statistics shows consumer caution continues to sit at an all-time high, despite the fact that rates have not increased since November last year.

Annual retail sales have endured sluggish growth of just 2 to 3 per cent. Pre-GFC, this growth historically hovered around the 6 per cent mark. Similarly, the household savings ratio has increased to 11.5 per cent from zero just six years ago.

So why have consumers become so cautious?

AMP’s chief economist Shane Oliver says there are several factors at play behind the new found caution of consumers, mainly an attitudinal change towards debt and savings.

“From the mid-1980s until about five years ago, consumer spending was supercharged by a combination of rising household debt levels and a fall in the household savings rate from around 15 per cent to zero,” he says.

“Debt was in, saving was out. This was driven by a combination of easy credit post financial deregulation, falling interest rates making debt more affordable, younger generations becoming more comfortable with debt as memories of serious economic problems faded, and rapidly rising wealth levels making active savings seemingly less necessary.”

But this trend has since reversed. The GFC provided consumers with a long overdue reminder that debt is indeed risky. In addition,

it warned borrowers that their jobs aren’t as secure as they first thought.

As a result, savings are now back en vogue and the pace of increase in household debt slowing to a crawl.

In addition, the debt build-up of the past has left households very vulnerable to higher interest rates. This is particularly so for those who entered the housing market on the back of the first home owners’ boost and generational lows in mortgage rates in late 2008 and 2009.

So talk and the reality of higher interest rates have only added to a more cautious attitude on the part of consumers.

Moreover, the portion of the household budget allocated to necessities such as power and water bills, fuel, rent, insurance and health is rising rapidly.

Genworth Financial’s mortgage trends report released earlier this year found the rising cost of living was deterring Australians from jumping onto the property ladder. And this is now evidenced in falling auction clearance rates.

Data from the Real Estate Institute of Australia shows auction clearance rates have slumped to 60 per cent from 75 per cent this time last year.

It seems Australians feel happier and safer saving their money rather than investing it in property. And the RBA’s decision to leave the cash rate on hold at 4.75 per cent in June is unlikely to change this trend.

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