Spending To Saving

Everyone knows John Maynard Keynes as the founder of monetarisim, the school of economics which has the study of the flow money at its root, but in reality he was the founding thinker of what we now know as behavioural economics.

Keynes knew, long before Milton Friedman and Amos Tversky began writing about it, that the wealth of nations wasn’t just a function of how much money was flowing around an economy but the confidence and behavior of the people in it.

Confidence is critical because it drives spending and importantly for the banking industry, it drives borrowing – and right now both of these are at all time lows.

One of the best indicators we have comes from the small business sector, which is by value almost half of the entire Australian economy and a fundamental driver of spending.

Small business owner confidence in the economy

Here at CoreData we have been tracking small business confidence for the past few years and it’s been declining pretty steadily from the bounce that we had in late 2009.

In part this can be explained by the fact that we have a Government that is meddling and yet decision free; in part it can be explained by the fact there have been some nasty natural disasters of late – but there is a larger, more systemic fear lurking out there.

What if the confidence that has driven the Australian economy since the 1980′s is simply gone? What if we have returned to a 1950′s style of capitalism, which is characterised by small investments, slow growth and large amounts of savings?

Some of the signs are out there. Our recent HNWI survey showed that Australians with more than $1 million outside super and their house were not intending to borrow in the future and have been paying down debt as fast as possible.

The same survey showed that only 4% of small and medium business have plans to borrow in the next 12 months and that all new growth will come from cash flow.

If this is true, if there has been a fundamental switch in the behaviour of consumers and businesses alike then that’s fairly interesting news for wealth management companies and banks – because none of them have adjusted their model in anticipation of this.