Australians are spending their savings as economic growth slows

Australia’s economy expanded for the fifth consecutive quarter but the ratio between household savings and disposable income has dipped below pre-pandemic levels.

The Australian Bureau of Statistics (ABS) latest National Accounts figures show Gross Domestic Product (GDP) rose 0.5 per cent during the December quarter 2022 and increased 2.7 per cent year-on-year.

These quarterly increases have been gradually losing steam since early last year. GDP in the June quarter rose 0.9 per cent, while in the September quarter it was up just 0.7 per cent.

Australians' savings buffer is slipping away 

ABS data revealed that the household saving ratio declined sharply between September (7.1%) and December (4.5%) 2022, to its lowest level since September 2017. Savings fell following a rise in household consumption and a fall in gross disposable income, according to the ABS.

The household savings ratio is calculated by dividing household savings by household disposable income. A lower household savings ratio indicates that households are spending more and saving less.

The graph below shows that the ratio peaked during the June quarter 2020 (23.6 per cent), during which time most Australians were under lockdown as a result of the pandemic. The ratio peaked again in September 2021 (19.3 per cent), followed shortly by all state lockdowns being perpetually ceased.

Findings from IBISWorld's recent trends suggests that the pandemic dramatically shifted Australians' saving habits.

"The sharp rises in the household savings ratio over the two years through 2020-21 was due to increased social assistance payments and income tax refunds in response to the COVID pandemic. Household savings also grew strongly during the pandemic due to a fall in spending on discretionary services as a result of the temporary shutdown of businesses and movement restrictions."

While household gross income rose (+1.6 per cent) and income payable rose (+8.9 per cent) - the largest increase since June 2002 - it clearly hasn’t been enough to offset the costs associated with the rise in interest payable on dwellings (up  23.0 per cent) reflecting the occurence of additional interest rate rises over the December quarter.

Household spending rose in December 2022 (+0.3 per cent), the weakest quarterly rise since the September 2021 lockdowns. Growth in discretionary spending (+0.4 per cent) tapered and is now more in line with essential spending (+0.3 per cent). Retail sales fell 3.9 per cent in the month of December following 11 consecutive monthly gains.

In February 2023, three of the big four banks boosted key savings rates by significantly more than the latest Reserve Bank of Australia (RBA) cash rate hike. These moves may have been motivated by the Federal Treasurer’s call to have the Australian Competition & Consumer Commission (ACCC) investigate stark contrasts within the savings sector, as the gap between the highest and lowest savings rates has widened dramatically in recent months.

What’s next for the economy?

Given that the full impact of nine consecutive cash rate hikes has yet to be fully felt by borrowers, the impending mortgage cliff is looming for more than 800,000 households, and the plausibility of a possible recession is swelling, it’s reasonable to speculate that there may be cuts to the cash rate at some point in the future.

However, for now, the RBA has warned borrowers to be prepared for at least two, if not three, more cash rate hikes in the months ahead as the Board continues its attempts to tame inflation by raising interest rates. 

Further rate rises could see Australians dip further into their savings to help cover the cost of mortgage repayments.

Rising interest rates and inflation aren’t just affecting savings accounts, but our mental health too. A recent research study found young Australians are literally losing sleep over the rising cost of living. Consider these five stress-relieving savings tips to combat the insomnia.

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