Unmasking the 'income recession' myth

Despite the declarations of a so-called income recession, Australian household incomes and wealth have hit new records.

One of the most interesting features of the Australian economy is just how dour everyone appears to be. It’s bizarre, especially when you note that our key economic stats show things are very good.

We’ve got an economy running at trend, a very low unemployment rate and prospects remain bright. The economic fraternity however, finds it almost impossible to get out of the crisis mindset, not helped by many in the policy establishment. Much of this I’d simply put down to intellectual laziness or an inability to think independently and outside of global events that occurred five years ago. Some investment bank economists have been talking about recession in every year since.

Funnily enough, during this latest recession -- the ‘income recession’ -- we find that in the same quarter the nation allegedly fell into it, household incomes rose to a new record: $280bn in the September quarter.

Household wealth for its part surged to $7.7 trillion. Indeed amidst all the doom and gloom on the Australian economy, one fact stands out. The country’s citizens have never been richer: household net worth increased by more than $650bn over the last year and hit a new record in the September quarter. Take a look at chart 1. 

Chart 1: Household net worth at a record

Since the GFC, household net worth is up about $2.6 trillion, which isn’t bad considering all the recessions we’ve allegedly had since then: non-mining recession, mining recession, east coast recession -- and now an income recession.

Yes, a good chunk of that is house price appreciation and the rebound in the share market. But not all of it. Indeed over the last year, stocks are flat and they’ve contributed nothing to the lift in total assets - in terms of the capital gain. Land and dwellings were a little over half of it.

What’s interesting through the supposed income recession is just how much rising incomes contributed to the lift in wealth. Noting the flat sharemarket, incomes from dividends or monies flowing into super accounts -- in addition to what was put into deposits and currency -- accounted for about 40 per cent of the lift in net worth. That’s remarkable.

Another good sign of balance sheet health is just how high cash balances are at the moment. Cash balances (currency and deposits) increased by $27bn over the last quarter to a record of $877bn. To put this into some perspective, cash now accounts for around 23 per cent of total financial assets. The average since 2000 is about 20 per cent with a low of around 16 per cent in 2007. For interest, and for the non-financial corporate sector, cash balances are also at a record high at over $400bn. Total assets for that sector are nearly $1trillion -- also a record.

As to the other side of the balance sheet, liabilities did rise and have hit a new record of just over $2 trillion. Yet total household assets are 4-5times the size. No contest.

All in all, Australian households are in a very strong position and nowhere near as fragile as made out by commentators. They are clearly more cautious than they were before, and confidence is low, but then that’s hardly surprising given the unrelenting negativity of policymakers, politicians and economists. Despite that rhetoric, household wealth and living standards have kept rising -- and have never been stronger. 

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