Record fall in wealth levels

Modellers database; Consumer sentiment

  • Wealth held by Australians in property, shares and other assets has fallen for the third straight quarter. In real terms wealth fell 9.9 per cent over the past year – the biggest fall on record (since June 1960). However real wealth has still almost doubled over the past decade.
  • CommSec estimates that the average Australian now has wealth equivalent to just over $230,000, down $19,000 on the record high set a year ago. The new wealth figures were contained in the “Modellers’ Database”, which was released today by Federal Treasury and the Australian Bureau of Statistics. Other data showed the rental vacancy rate hovering near 30-year lows.
  • Consumers remain rather pessimistic about the current and future economic outlook with sentiment falling by 2.4 per cent to 89.9 in January.

What does it all mean?

  • The global economic slump and resulting slide in share markets has dented the wealth level of the average Australian. Over the past year the average wealth has fallen by $19,000, while in inflation adjusted terms wealth levels have now fallen by almost 10 per cent over the year – the biggest fall in records going back 48 years. The latest figures give more precedence to phrases such as “the worst global economic downturn since the great depression”.
  • It is important to keep in mind that while wealth levels have taken a large hit over the last year, the near doubling of wealth levels over the past year will provide a buffer for many Australians. No doubt this will come as a moot point for younger Australians in their early 20’s or 30’s that have started to build up assets.
  • Similar to the full time job losses noted last week, the sharp slide in wealth will add further downward pressure on an already contracting consumer spending base. The continued signs of a rapidly deteriorating global economy highlight the need for the Australian government to shore up defences on a domestic front. As such CommSec believes that the tax cuts scheduled for June this year should be brought forward to March.
  • CommSec also believes that the government should give serious thought to a more radical proposal of temporarily cutting the consumption tax.
  • The initial optimism following the aggressive rate cuts and government stimulus over the back end of 2008 has started to fade. Consumer sentiment has weakened in the latest reading. No doubt the continued barrage of bad news on the global front has played its part in keep consumers nervous about the economic outlook going forward.
  • The unexpected onslaught of job losses in the US economy and the corresponding revisions to a longer and more protracted global economic recovery has made consumers more pessimistic. With most major economies experiencing recessions, if Australia manages to avoid a recession it will be nothing short of an exceptional result.
  • If there is one price that consumers can monitor it is petrol, and the substantial fall in the pump prices was behind the 12 per cent pickup in consumer sentiment over November and December. However January fuel prices have remained relatively stagnant, resulting in consumers focusing on other topical issues.
  • Importantly the rate cuts and handouts by the government have helped to improve family finances in the near term, but it’s clear that we’re not about to party just yet. Uncertainty about the outlook for the global economy, sharemarket and house prices are all weighing on our minds, affecting spending and borrowing decisions.

What do the figures show?

  • Federal Treasury’s “Modellers’ Database” shows that Australia’s private sector wealth stood at $4,956.3 billion as at the end of September 2008, down 2.0 per cent over the quarter. It was the third straight fall in wealth levels.
  • CommSec estimates that per capita wealth stood at $231,000 as at the end of September, down $19,000 or 7.8 per cent over the past year. Wealth peaked at $250,300 in September 2007.
  • In real terms, CommSec estimates that private sector wealth fell by 3.2 per cent in the September quarter and by 9.9 per cent over the past year. It was the biggest annual decline in wealth on record (48 years, since June quarter 1960).
  • By comparison, private sector debt rose in the quarter, up 5..0 per cent to $616.0 billion. The sharp fall in the Australian dollar lifted foreign debt levels in the September quarter but Australian dollar denominated debt also rose by 4.8 per cent. Per capita debt rose from $27,450 to $28,700.
  • Unfortunately no detailed break-up is provided of the quarterly wealth figures calculated by Federal Treasury.
  • Despite the decline over the past year, wealth levels of Australians are almost double those of a decade ago. Since 1998, real wealth is up by 87.6 per cent. Further, over the past five years real private sector wealth rose by 27.7 per cent.
  • Other data in the Modellers’ Database showed the rental vacancy rate easing from 1.41 per cent to 1.38 per cent in the September quarter, well below ‘normal’ levels of 2-3 per cent and near 30-year lows.
  • The index of consumer sentiment fell by 2.2 points or 2.4 per cent to 89.8 in January. The sentiment index is holding well above the 17 year lows of 79 hit in July. Still, the consumer sentiment index is down 12.9 per cent on a year earlier.
  • The current conditions index improved by 2.4 per cent, while the expectations index fell by 5.2 per cent.
  • Only two of the five components of the index improved in January.
  • The estimate of family finances compared with a year ago rose by 10.6 per cent while the estimate of family finances over the next year fell by 4.8per cent.
  • But the estimate of whether it was a good time to buy major household items fell by 3.5 per cent in January.

What is the importance of the economic data?

  • Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. The survey is aggregated from responses to questions on the current and likely future state of family finances, current and likely future state of the economy and whether it is a good time to buy a major household item. Confident consumers may be more inclined to spend, especially on major items.
  • The Australian Bureau of Statistics (ABS) and Federal Treasury release the Modellers’ Database each quarter. The ABS notes that “the Modellers' Database consists of over 500 quarterly times series constructed from the NIF and TRYM econometric models. They are useful to economists, econometricians, financial analysts and students.

What are the implications for interest rates and investors?

  • No one should under-estimate the impact of the global financial crisis on the Australian economy. While significant fiscal and monetary stimulus is being applied to the economy, more efforts to boost activity will be required. CommSec expects rates to be cut another 100bps over the next three months.
  • Volatility on the sharemarket is taking its toll on wealth levels, consumer spending and borrowing intentions. Simply, people know that they have to be more careful in the current jittery times.
Source Craig James, Chief Equities Economist, CommSec