Weekly economic briefing: Households bankrupting despite economic strength

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.

Households bankrupting despite economic strength

 

New data released by the Australian Financial Security Authority (AFSA) reveals that Australians are suffering increasing financial strife, with 31,288 Australians becoming insolvent[1] in 2017.
Personal insolvencies increased 5.5% in 2017, the largest annual increase since 2009, the time when families faced the most acute financial pressures of the global financial crisis as a result of higher unemployment and falling asset values.

Chart 1: Annual personal insolvencies and growth rates 2007 to 2017

Chart 1: Annual personal insolvencies and growth rates 2007 to 2017

The Australian economy fared reasonably well in 2017, with decent economic growth and very strong jobs growth. So why are more Australians getting into financial trouble?

Firstly, a large proportion of Australia’s 2017 economic growth came from strength in business investment rather than consumer spending. Despite remarkably high job growth, wage growth continued to stagnate at record low levels, meaning that most workers who were already employed at the start of the year didn’t enjoy much growth in their incomes in 2017.

In addition, growth in residential property prices has been consistently higher than growth in wages for over four years now – the longest period since the ABS started recording property prices in 2004. This means the gap between Australians’ earnings and the amount they are spending on property has been getting wider. This has been great news for home owners without a mortgage, and has helped support some spending through a wealth channel. But for those with a mortgage (and that’s the vast majority) the share of household income devoted to debt-servicing costs has risen to its highest rate in two years (and bucking the previous trend of falling or flat debt-servicing costs).

So despite decent economic growth, it’s not completely surprising that Australians are failing to keep up with mounting financial pressures. But as with any Australian economic story, the picture differs vastly across the country.

Chart 2: Per Capita Insolvencies by State in 2017 (personal insolvencies per 1,000 people)Chart 2: Per Capita Insolvencies by State in 2017 (personal insolvencies per 1,000 people)

Per capita insolvencies were by far the highest in Queensland, with almost two for every 1,000 people. This was likely because Cyclone Debbie hit the state hard, potentially affecting incomes of sole traders in particular, alongside inflation and rising house price rises.

Western Australia and Tasmania also had higher insolvency rates than the national average. WA had Australia’s lowest rate of wage growth in 2017, while Tasmania saw inflation and house prices grow faster than the national average.

Victorians were the most financially resilient in 2017, being the only Australians with fewer than one insolvency for every 1,000 people. However, this resilience is at risk of ending soon. Along with NSW and the ACT, Victoria already has a higher than average rate of households with high (more than 30%) mortgage-to-income ratios, meaning when interest rates eventually rise the state’s property owners will be at risk of falling behind.

[1] Total personal insolvencies include bankruptcies, debt agreements and personal insolvency agreements

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

 

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/

UK looking for a boost from the global recovery

  • UK growth has softened since the EU referendum, and at a time when the rest of the global economy is picking up. The pace of UK activity has not closely followed the news flow on Brexit, illustrating how politics is one of many factors influencing growth. After a poor first half the pace of UK GDP growth picked up in the second half of last year, even though the government lost its Parliamentary majority and the final destination for the Brexit process remained unclear.
  • Overall the UK posted GDP growth of 1.9% in 2016, the year of the referendum, and 1.8% in 2017, down from 2.4% in 2015. Though better than had been expected by forecasters, last year’s performance left UK activity slowing, albeit marginally, into a global recovery.
  • Brexit has had two negative effects, with higher inflation, stemming from sterling weakness, squeezing consumer spending power and uncertainty weighing on business sentiment. The downturn in consumer activity has been the swing factor behind slower overall activity. Growth in car sales, retail sales and mortgage approvals softened last year. The effects on growth were partially offset by a little-noticed acceleration in growth in manufacturing output, investment and exports.
  • Economists expect UK growth to slow more sharply this year. On average they see UK GDP growth coming in at 1.4% in 2018, down from last year’s 1.8%.
  • Brexit is the principle reason for the expected downturn. Most forecasters see risks to confidence, investment and wage growth from the Brexit process. The general view is that the consumer will continue to be constrained by weak wage growth. Moreover, while levels of consumer debt to GDP are well below pre-crisis levels, they have been rising, buoyed by double-digit growth in unsecured lending. The Bank of England worries this could weaken the resilience of the banking sector and banks have been pulling back from unsecured lending.
  • Poor productivity adds a further downside risk. In the last six years productivity growth has run at less than one fifth the level seen in the decade before the financial crisis. The persistence of low productivity has convinced the UK’s official forecaster, the Office for Budget Responsibility (OBR) that it is here to stay. The OBR has almost halved its estimate for long-term productivity growth, to 1.2%. This, in turn, has reduced the OBR’s forecast for trend GDP growth by a quarter.
  • Finally, the UK political scene has become more unpredictable. Since the government lost its Parliamentary majority last June the Labour Party has been ahead of the Conservatives in the opinion polls. In the first six polls conducted this year support for Labour has averaged 42% against 40% for the Conservatives, a reversal from April last year when the Conservatives lead over Labour averaged 19 percentage points. Jeremy Corbyn is now the favourite to succeed Mrs May as the next prime minister, with markets assigning a 25% probability to the event.
  • Yet for all the uncertainties there are reasons for thinking that UK GDP growth could do a bit better this year than the 1.4% expected by the average of economists.
  • First among them is the improving global backdrop driven by better prospects in Japan, emerging market economies and, in particular, the euro area. The global recovery is the key to offsetting domestic UK weaknesses, a point made recently by Lord Jim O’Neill, the former Goldman Sachs chief economist and Conservative Treasury minister. Lord O’Neill, a supporter of UK membership of the EU, argued that an accelerating global economy is likely to be more important to UK growth this year than Brexit, though he also cautioned that the UK could be doing even better were it not for Brexit.
  • Stronger global growth and a weaker pound have already bolstered UK exports, which grew by over 8% in the year to Q3 2017, five times faster than the growth of the whole economy. Last week the CBI reported that small and medium sized manufacturers are more optimistic about export prospects than at any time since survey data began in 1988.
  • So far wage pressures have defied economic theory, proving surprisingly weak in the face of declining unemployment. This may be about to change. The unemployment rate stands at a 42-year low and the number of people in work has reached a record high. Crucially, the rise in employment over the past 12 months has been driven by full-time work. Growth in in self-employment, which is often seen as sign as a sign of increasing spare capacity in the labour market, has softened. The number of job vacancies are at record levels and many employers are reporting skills shortages. I am inclined to agree with the Bank of England’s Michael Saunders, who sits on the Bank’s monetary policy committee, who has said that pay growth is likely to pick up this year as lower migration compounds existing recruitment difficulties.
  • Consumer debt is a potential risk for the UK, but one that will probably not crystallise this year. Most debt is held by households with above average incomes, and half by households with enough assets to clear their liabilities. While the Bank of England has begun the process of raising rates from their historic lows, monetary policy is likely to remain accommodative for a long time to come. Financial markets are pricing in roughly one 25bp rate hike in 2018 and a further 25bp in 2019. Such an outcome would leave the Bank’s base rate at 1.0% in two years’ time.
  • It is easier to think of things that will go wrong with Brexit, than right. But it seems plausible that by October the UK and the EU will agree some sort of deal to largely maintain the status quo during an extended period of negotiations. This would be consistent with the UK government’s desire to avoid two major sets of change for business, one at the time of the UK’s departure from the EU next March, and one with the implementation of the final settlement, from late 2020. Such an outcome would mean a ‘stand still’ on many practical aspects of UK membership of the EU between 29th March 2019 and the scheduled end of negotiations in December 2020. This would prolong the status quo for business – albeit leaving open the nature of the UK’s future relationship with the EU.
  • The outlook for UK growth this year is hardly stellar. But amid a global upturn our hunch is that it may turn out to be rather better than generally expected.PS: Despite better growth the US budget deficit is widening and could be soon be larger than at any time other than in recession and war. The Bipartisan Policy Centre, an independent US think tank, estimates that tax cuts and growth in public expenditure, particularly on defence, will raise the US deficit to 5.7% of GDP in 2019. Running a deficit of this scale when the economic recovery is mature and growth is strengthening worries many economists. At this stage in the economic cycle a government would ideally be narrowing the deficit or posting budget surpluses. The fact that the US is not doing so could limit its room for increased borrowing to counter a future downturn.PPS: The 1980s and 1990s saw significant convergence in the economic performance of the countries that are now members of the euro. This was a time of quickening economic integration, though the Single Market, EU expansion into central and eastern Europe and the introduction of the euro. But a recent IMF working paper suggests that in the last 15 years the economic performance of the countries of the euro area has shown signs of de-converging, partly as a result of the global financial crisis. One of the big decisions facing the EU is how future integration, and economic convergence, could be brought about.

 

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 2.9%, at 7,443.

UK and US equity markets suffered declines last week, unnerved by strong US jobs and incomes numbers and the prospect of higher US interest rates. US Treasury yields reached a new 3-year high on rising inflation expectations

 

International economic briefing by Ian Stewart

Economics and business

  • Dividend pay outs from UK companies rose by 10.5% to £94.4 billion last year with the resurgent mining sector accounting for almost half of the increase
  • In a sign that wage pressures are building US wages rose at the fastest pace in 8 years
  • The euro area grew by 2.5% last year, the strongest growth since 2007
  • Australia is set to tighten rules on foreign investment in agricultural land and electricity infrastructure to counter growing Chinese influence
  • BoA Merrill Lynch estimate $450bn of the $1.2tn due to be repatriated to the US following tax reforms could be used for share buybacks rather than investment
  • Christine Lagarde, Managing Director of the IMF said Arab countries must take “urgent action” to promote job creation to address “simmering discontent”
  • Portugal’s unemployment rate fell below 8% in December for the first time in more than 13 years
  • Poland posted its strongest annual growth for six years in 2017
  • The US personal savings rate hit a 12-year low in December
  • UK car production declined in 2017, the first annual fall for eight years
  • Overseas investment in London office space hit record levels in 2017, fuelled by Asian buyers
  • Japan’s manufacturing PMI rose at its fastest pace in almost four years in January
  • The number of new UK mortgages granted fell to a three-year low in December
  • UK manufacturing activity slowed in January to its weakest pace since June, according to the IHS Markit PMI survey
  • The stake on fixed-odds gambling machines in UK betting shops is set to be cut to £2 from £100

Brexit and European politics

  • Weekend media reports claimed that a group of Conservative MPs would oppose plans being considering by the UK government to strike a customs union deal with the EU
  • The EU is considering sanctions to stop the UK undercutting the euro area economy after Brexit, the FT reports
  • Theresa May said that the freedom of movement for EU citizens to move to the UK will end on the day of Brexit in March 2019
  • The EU ruled out a proposal from the UK on a post-Brexit free trade deal on financial services, the FT reports
  • Bank of England Governor Mark Carney told parliament that he hoped UK business investment would rise next year once Brexit uncertainties were resolved
  • Britain will be worse off under all economic scenarios after Brexit, according to leaked government analysis, the FT reported
  • The Irish minister for financial services has warned that a two-year transition period for a hard Brexit is “practically impossible”
  • Asylum applications in Europe fell by almost 50% last year, easing pressure on the region
  • A survey by RICS indicated that the government might miss its construction targets due to a Brexit-driven shortage of workers

And finally…

At least 12 contestants were disqualified from Saudi Arabia’s camel beauty pageant for enhancing their features with botox – just deserts


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