IN A world of sweeping changes, there is a prevailing view the consumer is at the heart of much of the pain being wrought on the Australian stockmarket.
But few researchers have warned that a key indicator of consumer caution, savings, may revert to levels not seen for more than 36 years wreaking even further havoc on businesses dependent on spending.
The theory is that Australians have been rattled by the global financial crisis and continuing volatility, resulting in a sharp rise in consumer savings.
As a consequence, the money being saved is not going to where it would otherwise go for example, to discretionary retailers as individuals reduce their debts and increase their savings.
All this is a hammer blow for businesses exposed to consumers, who suddenly find them in retreat.
In the retail world (although some have faced their own battle with private equity debt) the recent toll has included Colorado, Borders, Angus & Robertson and Clive Peeters.
The commonly held view is that eventually the strong levels of employment and an easing in interest rates will restore consumer confidence, and customers will come rushing back to the stores.
The warning that consumers may be inclined to save even more than they already are has been made by two fund managers at AMP Capital Investors, Simon Warner and Andrew Scott.
Saving levels are at their highest since the mid 1980s, running at levels above 10 per cent of disposable income.
Much has been made of how this represents a sharp hike from our whirlwind romance with debt in the late 2000s, when the household saving rate fell to below 0 per cent.
That is, like the proverbial drunken sailor, we were spending more than we earned through borrowing money.
But what has been less remarked on is that household saving rates nearly touched 20 per cent in the mid-1970s.
"Frequently, the assumption is made that once household wealth (or related measures such as debt to income or debt to assets ratios) has stabilised at pre-GFC levels, the upwards pressure on the savings rate is likely to subside," Warner and Scott write.
But they argue consumers may have realised more fundamentally particularly when they realised that the pre-GFC returns were not widely available that their savings rate is not enough to fund their retirement.
"When the household sector does look forward, the scale of underfunding for retirement goals under a variety of realistic scenarios has the potential to generate continuous upward pressure on the savings rate in Australia," they write.
"Investors should be aware that in our judgment the risks around the savings rate remain to the upside."
Frequently Asked Questions about this Article…
What has happened to the Australian household savings rate since the Global Financial Crisis (GFC)?
Since the GFC Australians have sharply increased saving. The article notes household saving rates are at their highest since the mid-1980s — running above 10% of disposable income — after falling to below 0% in the late 2000s.
Why are consumers choosing to save more instead of spend after the GFC?
The article explains consumers were rattled by the GFC and ongoing market volatility, prompting people to reduce debt and bolt money into savings. Fund managers also argue many households realised pre‑GFC investment returns are unlikely to recur and that current saving levels may not be enough to fund retirement, which encourages continued saving.
How could a higher household savings rate affect retail and consumer‑facing businesses?
Higher saving means less discretionary spending, which can hit retailers and other consumer‑exposed businesses hard. The article cites recent retail casualties such as Colorado, Borders, Angus & Robertson and Clive Peeters as examples of businesses that suffered when customers pulled back.
Who warned investors that the savings rate might keep rising, and what was their view?
Two AMP Capital Investors fund managers, Simon Warner and Andrew Scott, warned that risks around the savings rate remain to the upside. They argue consumers may continue to save because of retirement underfunding concerns and a reassessment of pre‑GFC returns.
Will stronger employment and lower interest rates automatically bring consumers back to spending?
While the common belief is that strong employment and easing rates will restore consumer confidence and spending, the article highlights Warner and Scott’s caution that households may still choose to save more if they believe their retirement savings or expected returns are insufficient.
What does the term 'savings rate' mean in this context?
In the article the savings rate refers to household saving as a percentage of disposable income — the portion of income left after taxes. It’s the share of earnings households put aside rather than spend.
What historical context should everyday investors know about Australia’s savings rate?
The article points out that although current saving levels are high relative to recent years, household saving rates have been even higher historically — nearly 20% in the mid‑1970s — and they fell dramatically into negative territory in the late 2000s, illustrating that the savings rate can move a lot over time.
What should everyday investors watch regarding savings and consumer trends?
Investors should monitor household saving rate trends, indicators of household wealth and debt (like debt‑to‑income ratios), and the exposure of companies and sectors to discretionary consumer spending. Those signals can help assess risks to retail and consumer‑facing stocks if saving behaviour stays elevated.
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