Credit Suisse says more rate cuts are on the way as Australian households batten down the hatches

Matthias Bhen / AFP / Getty Images

Australia’s household savings rate is set to rise as Aussie borrowers move to pay down debt amid falling house prices, Credit Suisse (CS) says.

And the bank’s analysts say such a scenario presents a key threat to domestic consumption in 2018 — the biggest part of the Australian economy.

“Supposing that residential investment flattens out at a high level, and that infrastructure investment growth slows, it is very hard for us to see where above potential growth will come from” Credit Suisse said.

“It is even harder to see inflation returning back to the RBA’s target band over the next few years. Therefore, we still see room for rate cuts.”

It’s a position Credit Suisse has held for some time, but the bank’s latest note provides some interesting reasoning for the outlook based on statistical analysis.

The CS research team’s view is derived from a regression model, which aims to predict the future direction of household savings based on three key indicators:

1. The net wealth effect of movements in house prices relative to disposable income;
2. Credit availability — i.e. the willingess of banks to lend; and
3. Minimum principal repayments relative to disposable income.

CS concluded Australia’s household savings rate — which currently sits at 3.2% — is around 2% below where the model suggests it should be.

“Convergence alone suggests that the saving rate needs to rise,” CS said.

“But in the near term, we also think that fundamentals are likely to evolve in a way that will require an even higher saving rate.”

So rather than just a 2% increase, the bank is forecasting household savings may have to rise by up to 3.5% — more than double the current level.

To start with, the analysts said the current savings rate is not sufficient to fund principal & interest mortgage repayments.

In fact, they said just for Australian households to meet minimum principal repayments will require an increase to the savings rate of 2%.

The analysts based their conclusion on an assessment of data on owner-occupier loans.

They applied statistical techniques to smooth the data — effectively adjusting for repayments ahead of schedule and calculating a baseline figure for minimum repayments that’s statistically robust.

The findings show the savings rate declined from the 1990’s until Aussie households battened down the hatches after the global financial crisis in 2008.

“But very recently, saving levels have been run down again to inadequate levels,” Credit Suisse said. This chart tells the story:

In addition to mortgage repayments, Credit Suisse said the savings rate may rise even further as households adjust to further price falls in the Sydney housing market and loan approvals decrease.

The bank’s view on the latter is based on its credit conditions index (CCI), which indicates loan approvals will continue to fall over the next 6 months:

And further analysis by the bank shows quite a strong negative correlation between loan approvals and household savings.

“Interestingly, the sharp fall in loan approvals around the time of the financial crisis foreshadowed a sharp rise in the saving rate around this time.”

Credit Suisse said an increase in the household savings rate of 3.5% will weigh on consumer spending, despite the recent strength in the labour market and tentative signs of wage growth.

“Even if the economy sustains very strong growth in hours worked of 4% per annum, and slightly more positive real wages growth, it is very hard to see consumption growth running at a strong pace,” Credit Suisse said.

The bank said the incumbent federal government may be preparing to offer tax cuts as part of the upcoming election cycle, but such an outcome remains uncertain.

It means Credit Suisse is maintaining its view that rate cuts remain an option on the table for the RBA, in an effort to boost spending and stimulate economic growth.

That puts CS on the dovish side compared to other experts, with analysts from Morgan Stanley and UBS arguing that rates are likely to stay on hold for the duration of 2018.

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