Cash flows are in better shape than they appear, says economist
Australian households are saving more than expected, according to the latest economic insight from ANZ.
The report, authored by ANZ head of Australian economics Adam Boyton (pictured above), has revealed that Australian households are saving more of their income than their New Zealand counterparts when excluding the consumption of fixed capital.
However, compared to pre-pandemic trends, Australian households are saving less than their New Zealand counterparts.
According to the ANZ report, Australia’s household cash flows are in better shape than the headline household saving ratio (HHSR) suggests, despite the HHSR being much lower than pre-pandemic levels.
Boyton pointed out that the discrepancy arises from the calculation method of the HHSR, which includes allowances for the consumption of fixed capital on the expenses side, reflecting depreciation of assets such as dwellings. This depreciation is not associated with contemporaneous cash flow. On the income side, the Australian Bureau of Statistics (ABS) includes imputed interest, which also does not align with immediate cash flows.
“Recalculating the HHSR excluding consumption of fixed capital and imputed interest, and converting it into a dollar value, shows the Australian household sector is saving only a little less than it was pre-pandemic,” he said. “Still, that lower saving ratio relative to the pre-pandemic period points to financial conditions being on the restrictive side.”
With household cash flows under less pressure than the headline HHSR would suggest, consumption could rise as real incomes lift over 2024-25, Boyton added.
“The extent to which that occurs will likely rely on the evolution of consumer confidence,” he said. “The ongoing weakness in confidence tends to suggest only a very limited pick-up in spending, especially when we take the likely slowdown in population growth into account.
“As a result, the household cash flow position does not necessarily support the case for a rate hike. So, while there is some risk of a move higher in the near term, our call remains for the RBA to start a shallow easing cycle in February 2025.”
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