Australian household savings ratios may fall to a 10-year low as inflation takes hold

Photo by Ian Waldie/Getty Images

Rising utility and food prices, alongside housing investment, will continue to squeeze Australian savings rates, which are already at their lowest levels since September 2008, according to Bank of America.

That forecast should add to concerns over financial stability risks and consumption, especially for retail sales. A study by Reserve Bank of Australia found that one-third of housing borrowers have less than a one-month buffer on their scheduled mortgage repayments.

With rising inflation chewing into real incomes, households will be forced to draw down on savings to fund essential items, dragging down the savings rate, Bank of America economist Alexandra Veroude and rates strategist Tony Morriss said in a note to clients.

This chart from Bank of America shows the connection between housing and net savings

“With households not increasing their buffers, albeit the rate of debt accumulation is likely to
slow, we continue to see financial stability as front of focus for the RBA,” the economists said.

“This is supportive of our call that the RBA will seek to remove excessive policy accommodation early next year, provided the labour market continues to strengthen.”

The RBA has cut rates since late 2011 to a record low of 1.5% to help the economy’s transition away from a once in a decade mining boom. Low rates have spurred a housing boom, with Sydney home prices doubling since 2011 and household debt levels surging to record levels.

Most economists expect the central bank to keep rates on hold for the rest of the year.

With regulators cracking down on mortgage lending, house prices have shown signs of cooling, which the economists said should reduce the appetite for investment in housing.

The savings rate, which rose after the global financial crisis, aided by the mining boom’s temporary boost to wages – peaked at 9.5%, but has declined gradually over the past six years. It stood at 5.2% in the December quarter as this chart shows.

Savings data for the first quarter will be released next month, along with National Accounts.

With wage growth going nowhere, Bank of America predicts one of the casualties will be retail spending. They summed up their views thus:

We began this year with a below consensus forecast of household consumption at 2.3% and 2.5% for 2017 and 2018, respectively, which is below the long-run average rate of 3.4%. While consumer prices are expected to be stronger in the near term, we maintain these forecasts as we see a lower savings rate absorbing the difference.

Retail sales fell 0.1% in March marking the third time in four months the measure has declined and missed forecast for a 0.3% rise.

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