Thrifty Times
In a time of great uncertainty and risk aversion amongst consumers it was surprising to see the RBA release figures this week showing that Australians now owe a record $49.4 billion in debt.
Although the figure in itself is cause for concern, perhaps more worrisome is the extent to which households are now employing credit card debt to fuel consumption.
When credit card debt is scaled as a ratio to household consumption we find an ever increasing proportion of consumption being financed by credit card debt.
According to the graph below, just over a quarter of all household expenditure is now being financed by credit card debt. The growth in credit card debt use since 2000 has been explosive, increasing from just over 10% in 2000 to the between 25 and 30% in 2008 and beyond.
Interestingly, however, the extent of credit card debt financing consumption appears to have slowed over the past year, with a sharp incline in the data not as evident as in the years from 2000 to 2008.
As has been mentioned in previous burningpants blogs, we at CoreData have been monitoring deposits rates in the economy for some time now and noted Australian’s continuing love affair with cash.
Why Australians have a love affair with cash is easy to understand. It is quite a rational response to the uncertainties of the capital markets to store your money in the bank. Risk aversion appears to be the order of the day.
Could this risk aversion also be then translating into a desire on the part of Australians to reign in household debt?
The shift from spending to thriftiness is illustrated in the chart below where saving as a proportion of consumption has seen dramatic increases over two periods; once in 2006 when the subprime crisis hit and then in late 2008 as the full impact of the GFC started to hit.
The data seems to suggest the increase in debt levels will be met by ever increasing savings levels as Australians struggle with the debt mountain. To what extent this will impact on economic output and the capital markets is an issue we will continue to monitor closely.
Watch this space.
2 Comments on “Thrifty Times”
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P.J. says:
Interesting article thanks! We are also monitoring the situation to see when there will be an outflow of capital away from cash to other asset classes. The debt issue though could very well delay the flow.
Stephen says:
I’ve definitely been seeing greater risk aversion amongst my smaller retail clients. Many are really struggling with managing their debt.