In recent years, Australian households have been saving a significantly larger proportion of their disposable income than in the previous two decades. Although the December quarter’s National Accounts data revealed a slight easing in the household saving ratio, the overall picture remains the same. Following a significant spike in December 2008, Australia’s household saving ratio has remained elevated at levels not seen in over two decades. Is this the corollary of the ‘cautious consumer’? Or does it merely reflect a return to more normal patterns of behaviour?
In order to address these questions, we must first examine the data. The chart below presents a 30 year depiction of Australia’s household saving ratio. Up to the mid 2000s, the saving ratio declined consistently and was negative in the early 2000s. During that time, household disposable income and consumption were converging.
That trend abruptly reversed in 2006 as net saving increased, with income growth becoming steeper than consumption growth. This was likely due to a combination of the rising terms of trade (stimulating income growth) and the impacts of the GFC (subduing consumption growth). Moreover, the initial rise in the saving ratio can be attributed to the Government’s fiscal stimulus, as the cash transfers to households provided a temporary boost to income that was not equally met by consumption. Nevertheless, the ongoing elevated saving rates since suggest other factors may be at play.
The notion of consumer caution implies that consumers will begin spending more strongly once confidence returns. However, the consumption binge from 1995-2005 occurred in the context of atypical factors and is unlikely to return. It was underpinned by the financial deregulation, ease of credit availability and relatively stable economic conditions prevalent during that period. The combination of these factors led to rising household leverage and high confidence levels, culminating in strong consumption growth and lower saving ratios. It was bound not to last, and an inevitable reassessment of consumption behaviour was awaiting only a trigger.
That trigger of course, was the GFC. The aftermath of the crisis led to general uncertainty and growing recognition of the risks of indebtedness. Households’ attitudes towards debt shifted, instigating a change in spending behaviour more consistent with historical trends. The rate of growth towards current saving proportions has been significantly faster than the fall in preceding decades, indicative of a rapid adjustment to a more sustainable balance between consumption and saving by households. Following an extensive period of rising debt, households are now deleveraging and consuming at a rate they are comfortable with. There is unlikely to be a relapse toward the low saving ratios of the early 2000s.
When viewing these trends from a long-term perspective, the ‘cautious consumer’ explanation does not suffice. Notwithstanding quarterly volatility, the household saving ratio has been steady for the past few years. Fundamentally, it appears elevated only when compared to the decade leading up to the mid 2000s. As the chart below shows, the aberration appears to not be the recent increase in the household saving ratio, but rather the slump in the early 2000s. As such, the ‘cautious consumer’ is really only returning to historically typical patterns of behaviour.