Weekly economic briefing: Debt junkies

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Debt junkies

Our recent Business Outlook forecasts noted that the clouds around Australia’s economy are clearing, led by a strong rate of jobs growth.

Yet key risks also remain, and none more so than having highly leveraged consumers. Debt equals vulnerability, and at 194%, the debt to income ratios for Australian families are the second highest in the world (behind only the Swiss).

Record low interest rates, soaring house prices and banks being willing to lend have greased the wheels of Australia’s economy over recent years, but have also added to this high level of household debt.

Consistent with this, the growth in housing credit has actually accelerated in 2017 to date, lifting to an increase of 6.6% over the past year – essentially its post-GFC average.  And as housing credit is still growing faster than the combination of wages and jobs, the underlying risks are still rising.

There are emerging signs of a credit switch however. House price growth in some markets, notably Sydney, looks to be slowing.

We are also seeing an easing in the number of new mortgage applications. The Equifax Consumer Credit Demand Index measures the volume of credit card and personal loan applications that go through the Equifax Consumer Credit Bureau by financial services credit providers in Australia. Released alongside the Index in September was data on mortgage applications, revealing that mortgage applications fell at an annual rate of 4.1% in the September quarter – the largest fall since December 2011.

But it seems that just as we are weaning ourselves off one form of debt, our interest in taking on another is sparking.

In contrast to the falling mortgage applications, measures of consumer credit have shown positive signs after a period of decline. Indeed, the stock of personal credit (excluding housing) has consistently fallen since the start of 2016, and was down by 1.0% for the year to September.

But the latest figures from the Reserve Bank show the number of credit card accounts were largely unchanged in the September quarter of 2017 from the same period a year earlier, while the number of purchases per account were up by 6.9%. And the ABS measure of the value of personal finance commitments appears to have recently begun to climb again, after a period of steep declines.

Forward indicators are also showing greater strength than official figures suggest. The Equifax September Consumer Credit Demand Index rose at an annual rate of 13.6% in the September quarter, an increase from the 10.3% growth in the June quarter (see chart below). While applications for personal loans have largely maintained their strong rate of growth (increasing 17.1% in the September quarter), the annual growth in credit card applications was the largest recorded in two years (9.9% over the same period).

 

Chart: Changes in Equifax Consumer Credit Demand Index

Source: Equifax Consumer Credit Demand Index, September 2017 Quarter

 

So does this recent surge in consumer credit on the back of a period of increasing mortgages show Australians are addicted to debt? Certainly, in part it could suggest that we are increasingly willing to take on debt as interest rates remain at record lows and the labour market shows some signs of improvement.

But the surge may also be due to changing credit card uses, particularly as a payment tool for small transactions, rather than reflecting an increase in credit. Similarly, increased promotional activity for credit cards and digital offerings in the personal loan space have meant customers are progressively moving away from traditional offerings to new entrants.

Regardless, Australians have proven eager to jump at the credit opportunities available to them – in all the variety of forms they take.

 

For more information on the Australian brief, please contact co-authors David Rumbens and Neal Sarma.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Decision time for the EU (and it’s not about Brexit)

  • What is the biggest question facing the European Union?
  • Brexit is the obvious candidate. The secession of a member state is an almost unimagined contingency. But for all the historic significance of Brexit the future direction of the EU itself is, for my money, a more important question.
  • The UK was a relatively late entrant to the EU, joining in 1973. By dint of a UK tendency to see the EU as a free trade area, not a nascent federal union, along with ‘opt outs’, notably from the Single Currency and the border-free Schengen Area, the UK has occupied a somewhat semi-detached position in the EU.
  • This status was confirmed by Mr Cameron winning a final opt out, last February, to the EU’s founding aim of an ‘ever closer union’.
  • With the UK heading for the door, the question is what ‘ever closer union’ means for the remaining 27 member states.
  • European integration has proceeded unevenly since 1957. The 1990s and early 2000s saw breakneck progress towards closer union. In 1992 the European Economic Union became the European Union, underscoring a more political and federal shift in direction. A year later the launch of the single market created a true free trade area for goods. Internal border controls between most member states were abolished through the 1990s and the decade ended with the launch of the single currency. By the eve of the financial crisis in 2007 free movement of labour had become a reality and the former communist states of central and eastern Europe had joined the EU.
  • It has been different in the last ten years. Holding the EU together, not integration, has been the priority. But to do so member states have ceded sovereignty in a number of areas – signing up to tougher rules on budget deficits, financing funds to counter debt crises and to bail out failing banks and transferring supervisory power over large banks from national governments to the European Central Bank. It’s pretty dry stuff, but it represents a further move in the direction of a more integrated EU.
  • The crisis also exposed divisions between member states, highlighting how a larger EU was also a more diverse one. The euro area debt and banking crises pitched Germany and the northern European member states against southern and peripheral European countries. Parties of the far right failed to achieve decisive breakthroughs in elections in Germany, France and the Netherlands this year, but they remain potent forces. In Central and Eastern Europe the tone has become markedly more nationalistic and hostile to immigration.
  • As for the future direction of the EU the options range from carrying on as now, and trying to make existing institutions work better to, at the other end of the spectrum, driving towards a United States of Europe.
  • History suggests that the most durable unions, such as the USA, eventually become fiscal unions, ones where a central authority exercises a high degree of control over taxation, borrowing and government spending. But the necessary diminution of national control to achieve a fiscal union is proving contentious in the EU.
  • Proposals to issue common EU bonds, or ‘Eurobonds’, have met resistance. Countries with low borrowing costs, such as Germany, tend to see Eurobonds as German lending its credibility to more indebted European countries to raise money on the cheap. In the process it would expose Germany to new risks and raise its cost of borrowing.
  • Germany has also blocked the establishment of a euro-wide insurance scheme to protect bank deposits. Germany worries that its stronger, more stable banks will end up propping up weaker banks elsewhere in the EU.
  • Germany’s mantra is ‘risk reduction should precede risk sharing’ – and that member states should demonstrate that they can control their own budgets and borrowing before there are further steps towards integration. Having prioritised strong public finances for decades Germany is loath to lend its support to nations which appear unable to follow its lead.
  • A larger, more diverse EU, means that the days of all nations proceeding as one are probably over, and arguably have been for at least a decade.  The fact that a number of nations, including Sweden and Poland, are outside the euro area shows that the EU is already moving at different speeds. In a recent speech Emmanuel Macron, a staunch pro-European, said that the EU would increasingly be multi-speed, with member states going ahead in some areas unimpeded by the refusal, or lack of readiness, of others to join. That a French President would promote a policy once derisively called “Europe à la carte” by some in France testifies to the profound change that has occurred.
  • As membership of the EU has increased, it has become more diverse. The governments of the EU range from the nominally socialist in Portugal to right wing and nationalist in Hungary. The gap in national income between the richest and poorest EU member state has risen ten-fold since 1981. A widening gap between the richest and poorest nations raises the cost of a fiscal union to richer nations. The willingness of EU nations to share risks and pool sovereignty varies by issue, but there are limits. On budgets and banks richer countries are wary of shouldering risk in poorer countries where rules, budget discipline and solvency are more fragile. Germany took the lead in accepting refugees in 2015 only to find that some EU member states were unwilling to share the burden.
  • Next month, the EU will hold its first summit of heads of state and government since July 2015. Its task will be to set a course for the next chapter in the development of the EU. German politics may well add complexity to proceedings.
  • The decision Europe’s leaders make will be vital to the future of the EU. The European dream lives on, and has powerful support. But it is likely to progress through looser coalitions and alliances, not, as its founders intended, through an “as one” drive towards a United States of Europe.
  • The population of the UK is 65 million, that of the remaining 27 EU nations 450 million. Brexit is important, but it should not obscure the future of an alliance of close to half a billion people.

PS: One of our readers, Hilary Cooper from The Finance Foundation, got in touch with us following last week’s Monday Briefing on the global decline of cash usage. Her research for the think tank found that the UK’s older population, those aged 80 and over, have a strong attachment to cash as a secure and tangible way of making payments and keeping track of their spending. The research also found that some are heavily dependent on cash as they struggle to use financial technology such as internet banking and ATMs, either due to physical constraints or security concerns. This is yet another argument for the importance of cash to prevent financial exclusion. Although younger generations who are familiar with current technology will enter this age group (expected to reach five million by 2030), it is important to remember the speed at which technology itself is changing.

PPS: Analysis by the Resolution Foundation shows that for UK households with below average incomes, annual housing costs were typically £714 higher in 2015-16 than they were in 2007-08. By contrast, those on above average incomes enjoyed cuts in housing expenses of £271 over the same period. The data highlights the contrast between homeowners who’ve benefited from reduced mortgage interest payments after the BoE slashed rates during the financial crisis and those that are renting whose payments have risen each year.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 0.7%, at 7,381.

The Zimbabwean military staged an apparent coup this week, detaining the long-serving President Robert Mugabe. The army said that they are angry at the way people around the President are running Zimbabwe and treating its people.

International economic briefing by Ian Stewart

Economics and business

  • UK inflation remained at its five-year high of 3% in October* Growth in central Europe was at its fastest in nine years in Q3, with Romania expanding by 8.6%
  • The Greek Prime Minister, Alexis Tsipras, announced a €1.4bn benefits package thanks to the country beating fiscal bailout targets set by its creditors
  • Stamp duty on an average London home now represents more than one-third of the typical annual earnings in the capital
  • More than one-third of UK home sellers have cut their asking price, according to Rightmove
  • UK shopper footfall fell in October by its largest margin since the Brexit referendum, according to the British Retail Consortium
  • UK retail sales fell for the first time since 2013 in the 12 months to October
  • UK wage growth was unmoved in Q3 as the total number in employment fell
  • BoE Deputy Governor Jon Cunliffe warned that he would need to see evidence of wage inflation before voting for another rate rise
  • Janet Yellen warned that investors were asking for more certainty on the path of interest rates than central banks were willing to give them
  • One of the US Federal Reserve’s most dovish members has said he is “actively considering” another rate rise next month, thanks to a tight labour market
  • Japan recorded its seventh consecutive quarter of growth in Q3, its longest run of growth since 2001
  • Moody’s Rating agency upgraded India’s credit rating on expectations of continued progress for economic and institutional reforms
  • Norway’s $1 trillion sovereign wealth fund proposed dropping oil and gas stocks
  • The world’s wealthiest 1% own half of the world’s wealth, according to a Credit Suisse report on inequality

Brexit and European politics

  • David Davis promised bankers and other professionals a special post-Brexit travel regime to allow them to travel freely across Europe* BoE Governor Mark Carney said that households and firms didn’t seem to be overly worried by Brexit
  • MPs have warned the UK must put a new customs system in place before Brexit to avoid mass disruption
  • The FT reports that London-based private equity firms are being told by investors that no more than 30% of funds should be invested in the UK over Brexit fears
  • BoE deputy governor Ben Broadbent warned that a hard Brexit could force it to raise rates even if growth slows
  • Aston Martin has warned that it may have to pause manufacturing if there is no deal in place when the UK leaves the EU
  • Boris Johnson rejected Irish demands for a five-year Brexit transition period
  • The Dutch Parliament has warned its government to prepare for a “no deal” Brexit
  • A survey of British entrepreneurs found that hundreds of people have rejected tech jobs in the UK due to concerns over future immigration policy

And finally…

  • The world’s first iron bridge, located in Shropshire, is to be restored thanks to a €1 million donation from a German foundation that wants to reinforce “cultural bonds” after Brexit – bridge over troubled water

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