Reserve Bank Governor, Glenn Stevens, thinks it’s a good time for Australian households to be saving more and borrowing less.
It’s not that we have a debt problem, it’s just household debt is now at a level we might find uncomfortable if the world economy slows again, especially with Europe under growing pressure and markets nervous.
Mr Stevens pointed out that Australian consumers seem to have become more cautious in recent months, whether it’s the bank’s rate rises, the publicity about Europe, the pull forward effect of the stimulus spending last year, or just a feeling that it’s time to be more careful in borrowing money.
We have in fact seen it quite strikingly with the now seven month slump in housing finance for owner occupiers, which hit a nine year low in April, according to figures yesterday.
And consumer sentiment fell for a second month in a row in June and is now lower than it has been for the past year or so.
Mr Stevens told a Sydney business forum yesterday that "Australia does not have a problem with public debt".
"Nor do we have a problem with corporate debt. Some highly leveraged entities foundered over the past couple of years but most of the corporate sector had pretty strong balance sheets going into the downturn and they are even stronger now.
"Australia’s budgetary position is very different from those in Europe and, for that matter, most countries.
"Public debt is low and budget deficits are under control and already scheduled to decline.
"The banking system is in good shape with little exposure to the European sovereigns having the biggest problems, and asset quality is generally better than had been expected.
"The flexibility afforded by our floating currency, coupled with credible monetary and fiscal policies, are all advantages in periods of global uncertainty.
"This doesn’t mean there will be no effects. But these factors put us in the best position to ride through this particular event, even if it does get worse.
"The big rise in debt in the past couple of decades has been in the household sector.
"There have been many reasons for that and, overwhelmingly, households have serviced the higher debt levels very well.
"The arrears rates on mortgages, for example, remain very low by global standards.
"As a result the asset quality of financial institutions has remained very good. So, to be clear, my message is not that this has been a terrible thing (his emphasis).
"But that doesn’t mean it would be wise for that build-up in household leverage to continue unabated over the years ahead.
"One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.
"It may be that many households have sensed this.
""We see at present a certain caution in their behaviour: even though unemployment is low, and measures of confidence have been quite high, consumer spending has seen only modest growth.
"This may be partly attributable to the fact that the stimulus measures of late 2008 and early 2009 resulted in a bringing forward of spending on durables into that period from the current period (though purchases of motor vehicles by households – a different kind of durable – have increased strongly over recent months).
"But the long downward trend in the saving rate seems to have turned around and I think we are witnessing, at least just now, more caution in borrowing behaviour.
"Of course this will have been affected by the recent increase in interest rates but the level of rates is not actually high by the standards of the past decade or two. We can’t rule out something more fundamental at work.
"We can’t know whether this apparent change will turn out to be durable. But if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing.
"Moreover if a period of modest growth in consumer spending helped to make room for the build-up in investment activity that seems likely, perhaps that would be no bad thing either.
"These sorts of trends would surely increase the medium-term resilience of household finances and accommodate the resource boom and the rise in other forms of investment with less pressure on labour markets and prices than otherwise."
If his thesis is correct, then it’s going to be a rough time for Australian companies supplying goods and services to consumers, especially those involving borrowed money.
Putting the continuing strength of car sales to one side, bank lending for housing is slowing, credit card advances are not strong, retail sales are lacklustre and house prices are coming off the boil.
If you had to assemble a list of businesses that might be impacted by this consumer caution you’d have on it banks, retailers, department stores in particular, perhaps some travel operators, real estate and property groups and eventually car finance and retailing. Even though car sales remain solid, it can’t last if consumers are becoming cautious.
