Is it us? Or things are quieter?
This past weekend we took a stroll down at one of Melbourne’s main shopping districts.
The streets were full…the restaurants and shops weren’t.
Let me tell you, it doesn’t look like it’s us.
Last week the Australian Bureau of Statistics (ABS) published the results for the September quarter on the Australian economy.
GDP growth figures were weak, mainly because of slowing consumer spending. While spending on basic items like food, insurance and health were all up, discretionary spending was down.
That is, spending on vehicles, furnishings, footwear and clothing among others.
In other words, households aren’t spending as much on things that aren’t absolutely necessary.
The culprit is low salary growth, and increases in essential spending, like energy bills. With higher bills and no extra money coming in, households are starting to cut down on things they don’t really need…
…and are saving less. According to the ABS report, Australia had the lowest savings rate for the September quarter December 2007. It declined to 2.4%.
Consumer spending makes a large part of the economy.
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Is the current economic slowdown temporary?
We doubt it.
The thing is the housing market is slowing too.
Auction clearance rates continued their drop this past weekend. According to data from Corelogic, Sydney prices have fallen 8.1% in the last 12 months and 5.8% for Melbourne.
The wealth effect could be starting to take a toll. The wealth effect is when asset prices go up households feel they have more money, so they spend more. With house prices falling, households don’t feel as rich as they did a couple years ago.
It’s something that happens when you see growth spurred through debt. Debt will initially increase consumption and create a boom that will push asset prices up.
Yet once the credit tap runs dry this will revert.
Current Australian household debt is over 100% of GDP. Debt-bingeing and consumer spending has driven the economy in recent years.
But now with banks more reluctant to give credit, consumers may finally have to face the fact that the time to ‘pay later’ has arrived.
According to the RBA’s deputy governor Guy Debelle, we could be in ‘unchartered territory’.
As he told economists at the Annual Australian Business Economists dinner last Thursday night:
‘From what I can tell what we haven’t seen anywhere in the world is a decent fall in house prices in two capital cities at the same time unemployment is going down and the economy is growing at a reasonable pace. This is uncharted territory.’
Debelle gave quite an interesting speech at the time. If you have spare time, I suggest you read it, it gives you some insights on what the bank is thinking.
In it he looked at the 2008 crisis and the role high debt played in it. As he mentioned (emphasis mine):
‘The key lesson that comes from the crisis that I will highlight today [The 2008 crisis] is leverage really matters. Leverage significantly magnifies the effect of any shock that hits the economy. Leverage might not start the fire, but it will pour petrol on a burning platform. At the same time, you need to keep the credit flowing to prevent the economy from seizing up…
‘[W]hat is the right amount of leverage in the system? When is there too much?
‘Leverage was at the heart of the GFC. Leverage in the banking system and highly leveraged non-bank institutions like Bear Stearns and Lehmans played a fundamental role in significantly amplifying the crisis. Excess leverage in housing sectors, such as those in the US, Ireland and Spain, was incredibly damaging. This has led to the long-lived effects we still see today, both economic and political…
‘Leverage can turn a manageable macroeconomic event into a very hard to manage crisis.’
We may not know how much debt is too much debt, but the truth is that high debt will always make things worse during a downturn…especially if credit shuts down.
And, there was an important admission in the speech (emphasis mine):
‘The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off. But should that turn out not to be the case, there is still scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower. We have also been able to examine the experience of others with other tools of monetary policy and have learned from that. Hopefully, we won’t ever have to put that learning into practice. QE is a policy option in Australia, should it be required.’
For a while now, the RBA has been adamant the next interest rate move will be up…now they are not so sure.
It could mean that as much as the RBA wants to increase interest rates, it may be stuck at 1.50% for even longer…or may even have to cut to boost spending.
Global growth is now slowing…we could be facing another global crisis soon.
Back in 2008, the RBA cut rates from 7.25% to 3% in the space of a couple of years to help them weather the crisis.
But this time, with interest rates stuck at a low 1.50%, it doesn’t have that much room to do that. And having high household debt will only make things worse.
Editor, Global Investor
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