Cash Is King

For the past six months at CoreData we have been scanning the data waiting for the first signs that Australians are starting to fall out of love with cash.

Here’s the theory – when an economy starts to emerge from a holding pattern, the first sign that something other than cash is being saved will be a reduction in the amount of cash that is being stored.

But quarter after quarter, ADI deposits hit record levels and now it seems the growth in cash has returned with the amount of cash being saved moving from a historically high 7.9% of GDP to a top of the normal range number of 8.9% of GDP in the past three months and approaching the 2003 savings peak of 9% of GDP.

ADIs currently hold a stunning $560 billion in retail deposits, more than $200 million higher than in early 2007, before the GFC.

If retail deposit system growth continues even at the current depressed rate, at a conservative estimate there will be about $600 billion in deposits by the end of calendar 2011.

Each quarter total ADI deposits hit a new record high, as investors continue to accrue increased cash holdings, but now the numbers are starting to slow and to slow quite fast.

The 1.5% March 2011 quarter system increase was down from the December 2.2% rise and the 3.5% September quarter gain, but equal with the June quarter data.

What’s really interesting about those figures is that we had a rise in savings in the December quarter – a time when Australians traditionally stop work, go on holiday and spend.

In 2010 we were so concerned about the future we remained a nation of savers.

The recent uptick in retail deposit annual system growth comes off the back of a system low of 7.9% of GDP in March 2010, leading us to think at that time that we had seen the end of cash as king.

But the trend quickly reversed as investors rebalanced cash portfolio allocations back to historical levels, and growth in system returned in late 2010 and early 2011.

It seems that cash will remain king for some time yet.