Speaking at the Westpac business lunch yesterday, the chief of Westpac Bank, Gail Kelly, urged businesses to brace for a prolonged period of sluggish growth, low interest rates, and ongoing consumer caution. From the AFR:
“We’ve got to get used to this, it’s going to be this arena [low growth, low interest rates] for quite a long time to come”…
“Customers are still preferring to pay down debt, we’re seeing that in our numbers every single month. Customers are preferring to save”…
“Customers are still cautious. We’ve got to get used to this major trend of coping, and thriving in a lower growth arena”…
“We’re dealing with structural changes, structural adjustments in our country as the mining boom has flattened and there’s less investments going in”…
It’s difficult to disagree with Ms Kelly’s prognosis. The fact of the matter is that the credit boom that took place since 1990 and the running down of household savings (particularly in the 2000s) were an anomaly, driven by the one-off deregulation of the financial system, the sharp reduction of nominal interest rates, and the baby boomers’ shift into their peak earning years whereby they borrowed heavily to invest in housing or purchased their biggest and best owner-occupied home.
These structural tailwinds are now behind us. In particular, household debt has stabilised at a very high level, with little headroom to move upwards:
Household savings rates have returned to long-run norms:
And the nation’s dependency ratio has turned for the worse as the large baby boomer cohort shifts into retirement, reducing the proportion of workers to non-workers:
These changes are structural and likely to persist for many years.
