WEEKLY E-MAIL

28 September 2020

AUSSIES ARE SAVING MORE THAN EVER

By James Malliaros

Over the last 30 years, Australian households have saved an average of 4.7% of their net disposable income per annum. However, as we have witnessed, the last six months has been a challenging period, with the COVID-19 hit on the economy, resulting in Australia’s first recession in 29 years.

As a result of the recession, for the June quarter just passed, the average savings rate rose to 19.8%, the highest level recorded in 40 years. This extraordinary $42bn increase in household net savings was due to a $35.2 billion fall in household spending and a $7.1bn increase in income due to the Government’s income assistance measures. If the early access to superannuation scheme were included as a savings measure, the household savings ratio would have jumped to 24.8%.

Household Savings Ratio

Source: Australian Bureau of Statistics, Auscap Asset Management

However, it is worth putting the increase in the savings rate into context. Australian Bureau of Statistics (ABS) data suggests furniture and household goods spending increased by 16% in the June quarter, but this increase appears relatively minor in the context of material declines in most other major categories of expenditure, such as recreation (-17%), health (-20%), clothing (-25%) and transport (49%).

Quarterly Household Consumption Expenditure Changes – June 19 to June 20 (%)

Source: Australian Bureau of Statistics, Auscap Asset Management

But rather than using the Government’s income support and reduced personal expenditure in categories such as travel and transport to splurge on discretionary goods, it appears that the majority of Australian households have prudently decided to improve their personal balance sheets. Adding to the increased savings rate, credit card debt has fallen by over 20% to $22.4bn in June 2020 from $28.4bn in December 2019 – clearly, a number of Australians are using COVID-19 as an opportunity to save.

While it is positive to see consumers reducing their credit card debt, most Australian household debt relates to housing. With the Reserve Bank of Australia cutting the cash rate to a record low 0.25% and mortgage interest rates at generational lows, total interest payments as a percentage of household disposable income now sits at 6.8%, the lowest level in two decades.

Given the low interest rate environment, household balance sheet repair and serviceability of household debt, there are reasons to be more optimistic on the medium-term outlook for consumer spending, which should help the country gradually recover from the worst of the COVID led economic recession.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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