AUSSIES ARE SAVING LIKE MAD!

Savings reached the highest point since the 1974 ‘Whitlam’ recession.

Consumers are increasing mortgage repayments

If 2008/9 economic recovery rate is repeated.......... its big trouble.

A week after the Australian Federal Budget the key question is will consumers spend?

The signs are mixed – while the July national accounts show savings at the highest level since 1974 – retail sales across most categories have recovered.

The early mortgage payments by consumers are a further sign of concerned consumers acting before 2021.

SAVINGS

Australians have trebled the amount of savings since 2018 – this is a sharp reversal from all other recessions since 1974. This includes the 1978/9 ‘oil shock’, 1987 ‘share market crash’. 1990/2 ‘recession we had to have’ and 2008/9 GFC.

This shows many consumers are cautious while others are fearful – why else would the savings quickly jump to such a high level?

The ABS graph is telling – what will these consumers do?

?MORTGAGE REPAYMENTS

There is also plenty of evidence consumers are also stepping up mortgage repayments – read the AFR pce below –

RBA confirmed last week that banks have changed lending standards - reversing earlier tightening. Hardly surprising but highlights the tough market for lenders - this is before bad debts emerge in 2021.

ECONOMIC RECOVERY

A comparison of Australian economic recoveries from four past recessions highlights the 2021/3 challenge.

The ABS graph below compares the recoveries from the last four recessions – it’s very clear 1973-79, 1981-88 and 1989-96 had deeper dips than 2008-15 yet achieved better recovery growth. The 2008/9 recovery was shallower than the previous three recoveries and longer term economic growth was half the previous rate.

If 2020/23 recovery is as anemic as 2008/9 was, then the Australian economy will be in real trouble.

Will a rescue plan as outlined in last week budget be enough?

The idea of tax cuts and business investment driving the economy must be called into serious question.

RETAIL SALES

Retail sales measures spending across six categories: Food, Household Goods, Clothing/Footwear, Dept Stores, Retail and Restaurants/Cafes. A number of other consumer spend is not captured eg Auto Sales , Travel etc. So retail sales is only part of consumer spend.

Yearly data across categories that have increased are – Food, Household Goods and Retail have increased by $16 billion ($9.7 Billion in Food). While Clothing/Footwear and Restaurants/Cafes have declined by $5.6 billion.

Homeowners plough cash into mortgages during lockdown

Michael Bleby AFR Senior reporter  Oct 12, 2020

Voluntary payments into mortgages more than doubled in July, August and September from the previous 12 months, data from non-bank lender Firstmac shows, raising the question whether consumers will save, rather than spend, extra cash handed to them in last week's budget.

Firstmac's analysis of its $5.8 billion direct retail mortgage book shows the level of additional payments made by borrowers jumped to an average 10.2 per cent of the portfolio in the past three months, compared with the monthly average payment of 4.8 per cent last year.

"There’s obviously a lot of money flowing through the economy and people are choosing to save that money," Firstmac chief financial officer James Austin told The Australian Financial Review. "Paying down the mortgage is another form of saving."

The surge in additional mortgage savings is consistent with other indicators, such as the June quarter national accounts showing the country's household savings ratio jumped to 19.8 per cent, the highest level since 1974.

On one hand, the figures, which explain the relatively low level of arrears among mortgages seeking payment relief, provide a counterargument to concerns expressed by the Reserve Bank of Australia in last week's Financial Stability Review that defaults could spike as these pandemic-relief measures come to an end.

But they also show a clear risk for the $17.8 billion in personal tax cuts Treasurer Josh Frydenberg announced last week to encourage people to spend and help lift the economy out of its first recession in 29 years: consumers could save, rather than spend, extra money they get.

Mr Austin said the increase in the extra payments by Firstmac's customers, which at the end of September stood at 7.3 per cent of its total $12.2 billion portfolio, showed people were cautious.

"It would have to suggest borrowers were feeling uncertainty about what’s coming, so they’re paying down mortgages," he said. "The obvious follow-on is they’re choosing not to spend it."

Spending catch-up

AMP Capital chief economist Shane Oliver said much of the delayed spending by consumers during lockdown was still likely to happen.

"A lot of spending delayed was mainly on services," Dr Oliver said.

"There will come some point in the next six to 12 months when people will say 'It looks like I’m going to keep my job after all. We’re starting to get coronavirus under control. I’ve got my mortgage to a lower level, so I might as well go out and buy a car or go on holiday.'"

People who have deferred repayments know when deferrals end they will have to pay higher payments or pay for longer.

— Saul Eslake, economist

The budget's tax cuts targeted at 11 million people will hand the most cash to wealthier people. Independent economist Saul Eslake said these higher earners, who would ordinarily spend less, would hang on to even more cash in the present time of economic uncertainty.

"We know the higher up the income scale, the less pressure you’re under to spend every dollar you’ve got," Mr Eslake said.

"In addition to the normal arguments that apply, you’ve got additional reasons to be sceptical as to whether people would spend it." The winding back of the JobKeeper wage subsidy was one factor, he said.

"If you’re on JobKeeper – and suppose 2.5 million workers are – you might think 'It might be good to put some money away for when JobKeeper terminates'," Mr Eslake said.

The ending of mortgage repayment holidays was another factor, he said. "People who have deferred repayments know when deferrals end they will have to pay higher payments or pay for longer."

A sign of improvement in confidence came in the decline of borrowers with fully or partially suspended repayments in Firstmac's figures. The lender's national percentage of accounts in hardship arrangements fell to 3.8 per cent at the end of September, down from 4.8 per cent in August and well below the mid-June peak of 5.7 per cent.

The percentage also fell for the first time in Victoria, the state hardest hit by the pandemic, to 4.7 per cent from 5.5 per cent in August. "It feels like a soft landing," Mr Austin said.

Mortgage prepayments had kept loan arrears on FirstMac's 3.8 per cent of borrowers on hardship arrangements low. Only 61 per cent of them were 30-plus days in arrears, despite the pandemic stretching for seven months, the lender said.