Is This How Aussie Banks Lie to You?
Just about every country in the world is seeing an expansion in its economy.
Some economies are growing more than others, but there is nonetheless a synchronised expansion across the world.
It’s this miraculous expansion that caused Bart van Ark, the chief economist of The Conference Board, a research firm, to say: ‘There’s basically no country in the world where the consumer is not doing well.’
Yet while the average country’s bottom line may look good, the reality is very different for the people who live in it.
Sure, it’s easy to buy stuff. And nowhere is that more obvious than in Australia.
A data dump last month showed there was a 1% increase in gross domestic product (GDP) in Australia for the first quarter ending March. That resulted in annual GDP growth of 3.1%.
Of course, like all good government statistics, they start to fall apart when you take a closer look.
Unsurprisingly, Australia’s famous red rocks helped boost GDP numbers. Growth in exports — mostly mining exports — accounted for almost half the GDP increase.
Almost equal to this was government spending. Infrastructure and healthcare spending once again came out as the big contributors to economic growth.
The rollout of the National Disability Insurance Scheme (NDIS) continues to be the gift that keeps on giving. The NDIS spending boost showed up 2017’s annual employment numbers. Around 150,000 new jobs created can directly be attributed to the NDIS rollout.
But consumption proved the biggest problem with the GDP numbers.
Australia is a service-based economy. If spending drops, it could trigger a recession. And, despite the reliance on resource exports, more than 60% of Australia’s GDP comes from consumption.
So, what’s the problem?
During the first quarter, there was only a 0.18% increase in consumption.
Rising costs, falling wages
The worrying lack of consumption growth can be attributed to three key reasons: rising costs, lack of wages growth and growing debt.
Between 2010 and 2016, Aussies were spending on average 1.6% more on housing costs, and an extra 0.3% on energy and fuel. Meanwhile, medical and healthcare costs had risen 0.3%.
That amounts to a total 2.2% essential expenditure increase — poorly matched by our paltry 2.1% wages growth.
Complementing rising costs and lack of wage increases is rising consumer debt.
Total household debt sits at $2.5 trillion, with roughly $1.6 trillion of that tied up in mortgages.
The average household debt-to-disposable income ratio in Australia is 199.7%. Which makes Australia the most indebted nation per capita in this supposedly expanding global economy.
Worse still, the Australian Bureau of Statistics says it doesn’t expect Australians to begin the ‘deleveraging’ process until debt-to-disposable income hits 205%.
Here’s the rub:
Of that 0.18% consumption figure, the only increases came from non-discretionary items. That includes essential everyday items like financial services, food, electricity, gas and other fuels.
Items like clothing and footwear declined. As did other leisure activities, such as eating smashed avos’ in fancy hotels. Both dropped near on 2%.
So Aussies are spending less and less of their discretionary income on the very things that make our economy hum.
That’s left some 1.2 million retail jobs at risk — 11% of the entire workforce. And that’s not factoring in the 800,000 or so hospitality workers.
All this puts Australia in a tricky position. After all, we are a consumer society. If people don’t buy things, we goes broke.
But is it already too late?
Are we broke already?
Part of the reason we may not be buying as much these days is because most Aussies are already broke.
The household savings ratio (savings to income) sits at 2.1%, down from 8% only two years ago.
Meaning not only are our wages barely keeping up with rising costs but, after the bills have been paid, there’s nothing left over to put in the savings account.
Earlier this year, Reserve Bank of Australia assistant governor Michele Bullock declared that there were ‘pockets’ of financial stress: ‘The overall level of stress among mortgages households remains relatively low’.
I disagree. Let me show you why.
Source: Reserve Bank of Australia
Somewhere between 10–20% of Aussie households have shown some degree of financial distress since 2011.
What concerns me most, however, is that the chart shows around 5% of Australian households have been consistently experiencing financial difficultly (at least three difficulties) since 2012.
Since data for 2016 was only provided at the start of the year, it’s already old and out of date.
Odds are that more households are facing financial hardship today.
Here’s another chart showing the extent to which Australians are struggling. It shows the banks’ non-performing housing loans.
Source: Reserve Bank of Australia
Today, non-performing loans are below the high of 0.9% seen during the 2008 financial crisis.
However, they’ve begun climbing again in the past two years.
Again we find financial distress nearing the previous peak.
But the real issue isn’t the 1% shown on the chart. It’s what you aren’t told.
You see, the data the banks provide to the market refers to debts past 90 days due.
Once an account is three months behind on payments, it becomes a bad or doubtful debt. And it must be reported.
But, up until this point, banks can manage the debt in-house.
It’s within the banks’ own collections and financial hardship teams that they can manage customers who are falling behind. And it is here that the bargaining begins: Half-repayments only a month or two behind with some ad hoc payments along the way helps keep the banks from reporting bad and doubtful debts.
And that’s where the real problem lies.
What the banks don’t tell you
The statistics say that bad debts, at less than 1%, aren’t a problem.
The reality is very different.
Banks would much rather keep this information in-house and limit the potential losses. A customer that pays half of a repayment is far better than writing a debt off.
They’d much rather work with a debtor than let the debtor default.
But that information isn’t made public — it’s an internal memo of sorts. One few people are privy to.
This is why a bank’s non-performing loans don’t look bad — the data isn’t showing the true number of people in a position where they may potentially default.
Internalising the arrears within a bank prevents you from being able to see just how weak the average individual is within the economy.
Financial distress data doesn’t match up with the weak wage growth, higher spending costs and poor savings rate.
What we get instead is a bunch of rubbery numbers pretending everything is OK.
On paper, the Aussie consumer appears that they can survive the financial distress they’re experiencing. In reality they simply aren’t buying as much as they did before — and for good reason.
This is something we know for a fact. What we don’t know is just how far behind they are on their car loans. If we found out what the true arrears figure were, we may discover that there’s far more than 1% of Australians in financial distress.