If you accept the premise that the growth in debt played a large role in the economic outcomes for the Australian economy in the past 20 years, as I do, then the current environment where we see a distinct lack of demand for debt must then have some impact on Australian growth. At least I reckon it should.
Now, of course, we are in the midst of a mining investment boom which the RBA feared would pressure both the employment market and the very fabric of the economy and its ability to deliver growth in a non-inflationary way. Well, at least, without inflation above the 3% target band. But the combination of a weak global environment and household retrenchment has meant that the fear of inflation, and the actual occurrence of same, is receding.
But what exactly might demand for debt at generational lows mean for growth? The following chart shows the relationship between the growth in the stock of outstanding debt and the growth rate in GDP:
As you can see the relationship is not perfect but it seems clear that there is some linkage between the pace in which the total level of outstanding debt grows and the pace of economic growth.
The slowing in the pace of outstanding debt is a result of two things. The fall in the demand for new credit which can be seen in the monthly credit statistics provided by the RBA and the banking statics from APRA and, secondly, the increase in the savings rate which is derived from the national accounts. The ABS says that:
Household net saving is calculated as household net disposable income less household final consumption expenditure. Household net disposable income is calculated as household gross disposable income less household consumption of fixed capital.
I could go on forever about what this means but suffice to say I’m convinced that if households are borrowing less and saving more, then consumption, which makes up more than half of the economy is going to be weaker than in an environment where they are happily accumulating debt. This is clearly going to have an impact on the overall level of economic growth in the future. The RBA has made more room for mining than they probably hoped for, the structural decline in demand for debt looks unfinished and thus the Australian economy looks like it too has some further restructuring to go.