Before we crack open the champagne, we need to put these statistics into perspective rather than looking at them in isolation - specifically let's look at what appears to have been happening in the economy over the past few years to get a deeper sense of what might be in store down the track and what households and business owners should focus on.
According to March 2019 data, the annual inflation rate is running at 1.3% - well below the RBA target range of 2-3%. Also, with approximately 60% of our economic growth dependent on household spending, there is little doubt that any pullback by households is going to have an impact on economic growth and therefore inflation which in turn drives wage growth.
Have Aussie households lost their mojo?
During much of 2018 and 2019 we have been told repeatedly of the pullback in the property market and the negative wealth effect that this has on households. Households don't feel as optimistic because their house/unit price has dropped. There has also been no shortage of reporting on the level of indebtedness of Aussie households compared to the rest of the world. Households run on confidence and therefore it shouldn't be surprising that households have become increasingly wary of debt and that there has been a deleveraging of household balance sheets. Additionally, households were aware of the 2019 Federal Election in which almost all pollsters predicted a labour victory which was going to see some significant tax changes (ie the franking credits/retiree tax, limitation on negative gearing and reduction in CGT threshold) and this contributed to households taking a subdued position when it comes to spending. These factors might help explain part of the story, particularly over the past couple of years, but there are other takeaways to contemplate some of which are structural and challenging other Western economies.
What to make of credit card lending rates?
The annual growth of credit card debt is at a 17-year low. Consumers are paying off their credit card debt by the due date and appear to be preferring to use debit cards and buy now pay later ("BNPL") arrangements to manage their finances. Of course, there will always be troublesome credit card users - but the overall statistics are interesting to observe.
How does the lack of growth in credit card debt correlate with bankruptcy numbers? We know that excessive credit card debt accounts for approximately 35% of Australian bankruptcies. Therefore, it is not surprising bankruptcy numbers have decreased given the decline indicated above.
However, does the increasing use of debit cards or BNPL arrangements also represent a change in consumer behavior for the better? This should be closely monitored because there is potentially a very significant undercurrent that could create debt addiction of a different form. An ASIC review of BNPL arrangements in 2018 revealed that 60% of BNPL users are in the 18-34 age group and 40% of the users in this age bracket earn less than $40,000 per annum. The review also found that 1 in 6 users of BNPL arrangements had become overdrawn, delayed other bill payments or borrowed money so they could make their BNPL payments.
One point to note is that most of the BNPL service providers are not legally required to undertake credit checks because they are not regulated under the National Credit Act which typically applies to credit providers because they charge interest. As BNPL service providers are only providing debt and have a different business model to credit card providers at present they are not subject to the above Act.
Most BNPL service providers make the significant bulk of their earnings (in most cases approximately 70%) from the fees that merchants pay them to have the service in-store. The balance of their earnings related to missed payment fees and other fees - but not interest.
Could BNPL arrangements impact the growth in credit card usage? Possibly, but I think that credit cards will still be used by many businesses and households where they want the ultimate flexibility that it provides. Of course, the rule of thumb with the use of any credit is that you should still be living within your means.
- At the end of the day whether the purchasing decision occurs with the use of a credit card or a BNPL arrangement - debt is debt and still needs to be repaid. Note the ASIC review shows that some BNPL users are using other forms of debt to pay BNPL debts!!
- Also remember those in the 35-49 age bracket represent approximately 40% (the highest proportion) of the total annual bankruptcy numbers in Australia. Such statistic has not change materially over the past 10 years.
- Excessive credit card usage/personal loans, loss of employment and relationship breakdown are the top three (3) causes of bankruptcy.
- One would be misguided to think that the extreme period of lower bankruptcy numbers and lower credit card debt levels are welcome signs and that all is "rosy" and there is nothing else to consider. They are important, but only if other key indicators are also headed in the right direction. Presently, we appear to have stalling economic growth, flat wages growth (at a time where we are at/near full employment), interest rates are at historic lows and considerable geopolitical risks which could have an adverse impact on the economy.
- Households should continue to get their debt levels well under control (and this will mean something different for each household) particularly in a low interest rate environment. If you need help with your budgeting and related aspects there is some great information on www.moneysmart.gov.au.
Will Aussie households regain their mojo?
Many households were already in a deleveraging mode before the outcome of the 2019 Federal Election. Post the election result which saw the Coalition returned to power, there does appear to be a level of renewed confidence amongst households and business owners. However, it is too early to say whether this will be sustained over the next few quarters. I believe that Aussie households can regain their mojo and start spending again. However, for it to be sustainable we need to start to see wage growth. The Federal Government and the RBA are acutely aware of this and one gets a sense that they will need to pull on certain monetary and fiscal policy levers during the course of this year to get households confident again.
Absent of external shocks arising from largely geopolitical risks (think trade wars) then I do believe that the Aussie household will regain its mojo. But it is delicately positioned. If economic growth stalls, then we may be in for a bumpy ride.
The record low bankruptcy and credit card debt numbers make great headlines, but there are many ways that households can get into too much debt. Sometimes this occurs through poor planning, not providing for tax liabilities, extravagance in living and sometimes just bloody bad luck - such as serious long-term medical condition coupled with a loss of employment.
There will always be data available for economic or other forms of analysis that will make for interesting headlines. Most households if they are anything like mine, are time poor! So focus on what your household financial objectives are, regularly review them and don't let yourself get too distracted by the noise. If you need to make changes, then there are lots of useful resources to assist. No matter what age you are, always continue to invest in yourself in getting better at what you do or learning another skill.
However, if you find you are in a financial hard spot and you can't see your way through, please contact me to get a clear direction and peace of mind about how to deal with it.