Australian consumers have been saving and not spending in recent years, which is probably a good thing for the economy, the central bank governor says.
The higher savings rate is the result of people being more cautious after natural disasters, speculation that interest rates will rise, political arguments in Australia and uncertainty about the global economy, Reserve Bank of Australia (RBA) governor Glenn Stevens says. And if some of the causes of fear lessened, then consumers would become noticeably more optimistic, he said in a speech to The Anika Foundation lunch on Tuesday.
Katie Dean, head of Australian economics at ANZ, said while the RBA governor did not comment directly on the likely direction of interest rates, his speech was in line with the central bank’s tightening bias.
“In a counter to the argument that Australian monetary policy is currently too tight, the RBA governor has today reasserted the conclusion that Australian households are currently ‘cautious,’ not constrained,” she said. “The Governor points out that the slowdown in consumer spending over the last few years has not come about because of slower income growth. Instead, slower consumer spending largely reflects household balance sheet repair, as evidenced by the sharp rise in the household savings ratio.”
Mr Stevens also said Australia is experiencing a mining investment boom that Mr Stevens calls a “once-in-a-century event.”
The boom is expected to help lift economic growth to 4% over the next financial year, according to budget estimates from the treasury, and has already pushed the unemployment rate below 5%. But Mr Stevens added that it was unclear how long the boom would last, and so it was reasonable for people to spend less in the face of that uncertainty.
“Viewed in long-run perspective, it is not unreasonable for a nation to save a good deal of a sudden rise in national income conferred via a jump in the terms of trade, until it becomes clearer how persistent that new level of income is,” he said.
“It is entirely possible that, were some of the current raft of uncertainties to lessen, the mood could lift noticeably, so I don’t think we need to be totally gloomy.”
Mr Stevens also said that the current lower level of spending looked normal with a longer term view, given people had been spending more than they earned in the preceding years.
“A rapidly rising saving rate isn’t normal, but nor is a continually falling one,” he said.
Mr Stevens said Australia is doing something that has been rarely done in the past – capitalise on its good fortune. The higher rate of saving would increase investment and help lift productivity.
“The income results of that would, over time, provide the most secure base for strong increases in living standards,” he said. “That sort of an environment would be one in which the cautious consumer might feel inclined towards well-based optimism, and re-open the purse strings,” he said.
AAP with Switzer
