Weekly economic briefing: Dollars and sense – Financial Consciousness Index

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.

Dollars and sense – Financial Consciousness Index

Consider the financial services Royal Commission, the nurse and the public policy dilemma… What sounds like the start to a bad joke, is increasingly a tale with warnings for public policy decision-makers across Australia.

The Commission heard from Jacqueline McDowall, who planned to purchase and run a bed and breakfast with her husband, so that the nurse of 30 years could retire.1 With a little over $200,000 in superannuation in two industry funds, a home with a mortgage on it, two car loans and other personal debts, they went to a financial planner, who said it was feasible to do this through a self-managed super fund. The business banker said they could borrow to fund the property purchase. On this advice, the McDowalls sold their family home and began renting, to be later advised they could not use superannuation funds to invest in an owner-occupied property. The McDowalls are still renting, and working to purchase another home to live in once retired.

Stories like this highlight how asymmetries of information can let people down. And this isn’t the first time the world has seen this dilemma.

Research prior to the global financial crisis showed that many Americans taking out home loans either didn’t read, or didn’t understand their loan documents, meaning, in many cases, they didn’t realise they were authorising ‘teaser loans’ where interest rates start out low but increase after a few years. This lack of financial understanding, combined with predatory lending, caused the subprime loan crisis, the precursor to the full-blown financial crisis.

Poor financial understanding increases risks. It can also be a barrier to achieving a productive economy – good economic outcomes require borrowers to have good information, and to understand it.

In the absence of this, there’s a market failure asking for a policy solution.

Deloitte Access Economics has developed a Financial Consciousness Index to track how Australians fare in not only their financial understanding, but also their financial outcomes.

So what do we know? The average Australian scores 51.2 out of 100, putting them right in the middle of the Index. Breaking this down, 27% of Australians meet the threshold of basic financial consciousness (a FCI score 45-55), while only 9% are enlightened enough to be at the peak of financial consciousness (a FCI score over 70).

What really determines an FCI score? Age certainly matters. When a person’s income is higher, so is their FCI score. And we see yet another gender gap, with men averaging higher scores than women. Higher education and having a mortgage also play roles when it comes to being more financially conscious.

But we also know that this ability to make choices can be heavily influenced by a person’s life circumstances – for those struggling to keep their heads above water, superannuation balances or what interest rates are doing aren’t usually top of mind.

What didn’t we see coming? Less than half (40%) of Australians meet the basic threshold for financial literacy and capability. It also turns out 41% of Australians with a mortgage don’t check interest rate changes because they either have no interest, don’t know what the RBA cash rate is, or do not see the relevance to them. And of those with a mortgage, 68% said they haven’t stress tested their home loan.

Given the current low interest rate environment, people could be forgiven for underestimating the importance of interest rates. But some major banks have recently lifted their interest rates out-of-cycle, and we expect the Australian cash rate to rise over time (though perhaps not until later in 2019, giving some more breathing space).

In better news, Australians mostly believe they have control – it’s their choices, decisions and knowledge that influences their financial outcomes. Certainly a case of dollars and sense.

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

Chalmers, Stephanie and Michael Janda. ‘’I felt humiliated, stupid’: Retirement dream shattered by poor advice, royal commission told.’ ABC News, 20 April 2018.

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/

Oil at $80

  • In May we wrote that geopolitical factors posed an upside risk to oil prices. Those risks have materialised. Last week the oil price reached $82 a barrel, up 40% over the last 12 months and the highest level in almost four years. Some analysts are warning of a spike above $100.
  • Three factors are at work.
  • First, following America’s withdrawal from the 2015 nuclear deal the US will re-impose sanctions on Iran in November and has threatened secondary sanctions on countries which buy Iranian oil. US security advisor John Bolton said the US could reduce Iran’s oil exports to zero. Iran was the fifth largest producer of crude oil last year, accounting for 5% of the world’s total crude oil production.
  • Second, Venezuela’s oil output has slumped, a victim of the country’s chronic economic mismanagement and US sanctions. Venezuelan oil output is running at just half the level of late 2015 and seems likely to fall further.
  • Third, the major oil producers led by OPEC but including Russia, Mexico and others, have decided against further increases in oil output. In doing so the producers have turned a deaf ear to President Trump’s increasingly bellicose demands for OPEC to raise output. (Mr Trump recently tweeted: “the OPEC monopoly must get prices down now…[and] stop ripping off the rest of the world…I don’t like it”.)
  • Higher oil prices transfer resources from oil consuming nations to oil producers. For Western nations this means less spending and slower GDP growth. Sharply higher oil prices have, for this reason, preceded most major recessions of the last 70 years. In July, ratings agency Moody’s said the rise in oil prices over the first half of the year contributed to a rise in the probability of a US recession materialising by 2020 from 28% to 34%. The higher oil price is also likely to weigh on growth in the euro area and in oil consuming emerging market economies next year.
  • While geopolitical developments have helped boost the oil price, supply and demand fundamentals point to longer term downside risks.
  • Global oil supply has been revolutionised by rising US production. Fracking has helped double US crude production in the last ten years, making the US the world’s largest oil producer last year. In time, higher oil prices boost exploration and investment, just as the sharp decline in prices in 2014/15, hit investment. The number of rigs exploring for or developing oil or natural gas in the US and Canada has risen almost three-fold in the last two years. Improvements in horizontal drilling and hydraulic fracturing have brought costs down sharply. Global levels of capital investment in oil and gas have also been rising for the last year.
  • Meanwhile the crucial nature of Saudi Arabia’s relationship with the US may yet result in the Kingdom raising production to offset falling Iranian output.
  • On the demand side, slower global growth will soften demand for oil and, in time, weigh on oil prices.
  • It’s for these reasons I am inclined to think the oil prices will be lower in a year’s time than they are now.

PS: Last year we wrote about the work of Nobel Laureate Angus Deaton and Princeton economist Anne Case who shed light on the remarkable decline in the life expectancy of white, working class Americans. Last week data from the ONS revealed life expectancy in the UK has stopped improving for the first time since 1982, when figures began. A spokeswoman for the Department of Health and Social Care said “Recent trends in life expectancy and mortality in the UK can also be seen in a number of countries across Europe, North America and Australia.”


The FTSE 100 ended the week up 0.5% at 7,510.

International economic briefing by Ian Stewart

Economics and business

  • UK prime minister, Theresa May, said that the UK plans to have “the lowest rate of corporation tax in the G20” after Brexit and will become “one of the most business-friendly economies in the world”
  • The US grew by 4.2% in the three months to July, the fastest pace in almost four years
  • The US Federal Reserve raised interest rates for the third time this year and reiterated its intention to gradually tighten monetary policy
  • The Italian government agreed on a more fiscally expansionary budget than investors anticipated, sending ten-year bond yields up 27 basis points to 3.2%
  • Profits of China’s large industrial companies slowed to a five-month low in August in a sign the trade dispute with the US is impacting businesses
  • BMW warned that this year’s profits will be lower than previously thought due, in part, to the US-China trade war
  • Turkish economic confidence sank in September to its lowest level since 2008
  • The IMF agreed to increase Argentina’s bailout package to $54bn, greatly reducing the risk of the country defaulting
  • Global M&A activity set a new record in the first nine months of the year, beating the previous high set on the eve of the financial crisis
  • The UK Labour party set out plans under which any company with more than 250 employees will have to hand over 10% of its equity to employees and reserve at least a third of positions on the board for employee representatives
  • Fashion retailer Next said that for the first time it expects its online sales to account for more than half of total sales this year

Brexit and European politics

  • The FT reports that the EU is planning a fast-track process to pass emergency laws within five days in order to prepare for a no-deal Brexit
  • 23% of UK businesses plan to stockpile goods to prepare for a hard Brexit, according to the Chartered Institute of Procurement and Supply (CIPS)
  • The CIPS also found that ten percent of UK and EU firms could face bankruptcy if new border checks at EU-UK introduced a 10 – 30 minute delay
  • UK’s Labour party voted overwhelmingly to provide UK voters with an option to remain in the EU in the event of a second Brexit referendum
  • As few as 630 UK-based finance jobs have been moved overseas so far in response to Brexit, according to a Reuters survey
  • The UK Cabinet agreed that EU migrants should be subject to the same immigration rules as non-EEA migrants after Brexit and that the new UK immigration regime should focus on high-skilled migration
  • German chancellor, Angela Merkel, warned the EU against adopting an excessively harsh stance in Brexit negotiations and stressed the importance of the UK-Germany “friendship”
  • Nearly two-thirds of UK businesses, largely small- and medium-sized, have still not done a risk assessment for a no-deal Brexit outcome, according to the British Chambers of Commerce

And finally…

  • The mayor of Venice has proposed a new measure to deal with the city’s overwhelming tourism levels, suggesting visitors be fined up to 500 euros for sitting down in undesignated spots – stand up for your rights

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