For some time now, we have been told that “the cautious customer” is every retailer’s nightmare, especially in the context of household spending. Interestingly, according to recent news on the subject, research on household income savings has been developed.
Apparently, taking into account national counts, the household savings’ rate, which is the amount of income one saves, as opposed to directing it towards consumption, diminished by 7.6 percent in the third quarter.
During previous years, household savings were estimated at nearly 10 percent of one’s income, as a result of the global financial crisis. At that time, it appeared that Australians were set on loosening the purse strings.
Moreover, that occurred at a time when wages were increasing at a slightly slow pace, at a time of economic uncertainty. Needless to say that this type of environment isn’t ideal for taking financial risks and minimise savings. The following question naturally emerges – what determines this significant drop in savings?
The explanation behind this situation in savings
First things first – The mathematical reason the savings’ rate decreased is obvious. As household consumption is active, there’s minimal growth in income. The result is clear – fewer finances can be directed towards savings.
Experts claim that, although the economy is lethargic, at the moment, people have begun cutting back on savings due to the “wealth effects” – the impression that our financial wellbeing is imminent when house prices are on the rise. However, these gains are, in most of the cases, illusory.
Next on the list is cheap petrol. That makes the consumer feel good about his/her current budgeting situation. Economist Michael Workman affirmed that old-fashioned confidence can have a detrimental impact in this scenario as well. When the individual is optimistic given the economic progress, he/she will find it ok to spend more, as opposed to placing his/her earnings toward a savings account.
Another reason behind the decrease in savings is the smoothing spending patterns. What does that imply? The Reserve Bank has indicated that many Australians, particularly those in mining states, boosted their savings during the mining boom. That was because they assumed the higher income was only temporary. Afterward, to support a similar lifestyle, they started spending from the savings account.
In a nutshell, the Reserve Bank predicts that this trend is likely to continue. With the average pay increasing at a snail’s pace, household costs won’t return to the way in which they were in the 2000s.