Global Economic Issues

Households

For the economy to grow, we need to see positive activity from at least one sector.  In China, the lack of demand from the USA was balanced by the fact that so many people had gained access to employment, and domestic demand from households grew.  Here in Australia, the government was hopeful that encouraging spending by the household sector would work to stimulate aggregate demand in this country too.

Unfortunately consumer confidence in this country fell.  After the collapse of Lehman Brothers in September 2008, the level of confidence was recorded at its lowest level since January 1992.  This meant that despite the fact that consumption spending was increasing, the rate of increase was very slow.  There was no way that this was going to compensate for the reduction in demand that we were seeing in other areas. 

Another common reaction by consumers when confidence falls is that they start to save a higher proportion of their income.  There are many reasons for this.  First, some people may fear that they will lose their job.  As a form of protection for their standard of living, they will delay consumption until they feel more confident about their economic circumstances.  Delaying consumption is just another way of saying that they will save their money.  It is also true that some discerning buyers may wait because they believe that prices will fall.  For example, as the stock of new cars increases, consumers might believe that suppliers will eventually have to reduce prices in order to clear their stock.  While they wait for that moment to arrive, the money will be saved.  Finally, many consumers will save money for the same reasons that they always have; to fund larger purchases in the future.  We know that all of these things happened during the financial crisis, because the household savings ratio peaked at 6% in December 2008.  It is not surprising that this coincided with the same quarter in which the Australian economy experienced a negative rate of economic growth.  (While 6% might not sound high, keep in mind that between 2002 and 2005 Australia maintained a negative household savings ratio.)

Householders also start to become more wary of any debt that they are holding during an economic downturn.  As it is more likely that some people will lose their jobs, it is important that people are sure of their ability to repay the debts that they have.  One way of assessing this is by comparing the percentage of our income that is consumed by interest repayments.

In June 2007, the percentage of our income that was consumed by the interest payable on our mortgages (that is, just the borrowing that we have to fund housing) was 9.9%.  Three months later it climbed above 10% for the first time ever, and by June 2008 it had peaked at 12.1%.  After that, things changed.  Interest rates were falling, and people did not have the same appetite for debt that they had maintained prior to the crisis.  By June 2009 this ratio had fallen to 7.9%.  It is important to remember that average house prices were increasing during this period, and so in order to buy houses people were often in a situation where they had to borrow more money.  But this was off-set by the fall in interest rates, and also by the relative income levels of the people who were borrowing.  Another interesting statistic is calculated as the total value of debt compared to our total level of disposable income.  Between June and September 2001, this ratio exceeded 100% for the first time.  It increased consistently until December 2007, reaching almost 160% at that time.  But after that a change in household behaviour can be detected, and by June 2009 the figure had fallen to 155.7%.  This suggests that either people are using more of their own money to buy houses, or they are buying houses that are more modest relative to their income level.

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