Australian Markets Weekly: High household debt as a drag on spending

Recent RBA research shows that high mortgage debt is a drag on consumer spending, helping explain the weak growth in consumption since the global financial crisis.

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For the full picture, download the report – Australian Markets Weekly 15 July 2019.

  • Recent RBA research shows that high mortgage debt is a drag on consumer spending, helping explain the weak growth in consumption since the global financial crisis. This echoes earlier BIS work showing that high household debt has a negative effect on GDP growth over the long term, with this effect magnified when debt exceeds 60% of GDP.
  • Australia breached the BIS’s 60% threshold in the late 1990s, with household debt now a record 128% of GDP (or 201% of income). Gearing has increased across the income distribution and also among older Australians, but has actually fallen for younger households (this partly reflects the difficulty younger households have in securing a deposit on a mortgage). Heavily-indebted households have become more common across both the income and age distributions.
  • The RBA analysis likely informed the Governor’s recent comments that lower rates are less effective because of high household debt, although they still affect cash flows, the currency and asset prices. While gearing has stabilised over recent years, any decision by households to reduce leverage would raise the risk of a longer period of subpar growth in GDP, something borne out by international experience with deleveraging.

The week ahead – Employment, unemployment and the NAB quarterly business survey

  • The RBA is closely monitoring labour market data to determine whether it needs to cut the cash rate further, which makes June’s labour force survey on Thursday key. We expect the unemployment rate will hold at 5.2% alongside 20k employment growth, where a rise in unemployment would increase the likelihood of an August rate cut. RBA minutes on Tuesday will likely echo Governor Lowe’s recent remarks that the outlook remains “reasonable” with further easing depending on the data. The NAB quarterly survey on Thursday includes updates on employment and investment intentions that are used by the RBA.

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