Stop saving, start spending: MYEFO

Mid-year outlook says household borrowing will drive economic growth, but consumers aren't feeling the joy.

No Christmas cheer in the hip pocket

Consumers are gloomy about the state of the economy and the cost of living heading into Christmas, CHOICE research shows.

Consumer Pulse is a nationally representative survey, conducted quarterly, that tracks Australians' views about the economy and household spending. The December results show that by several metrics consumers are under increasing financial pressure, and are less positive about their household budget and the national economy.

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The latest Consumer Pulse data reveals the lowest level of households living comfortably since June 2014. When asked what their level of comfort was with their household income, 25% of respondents said they were "living comfortably", down from a high of 33% in December 2015.

"Many Australians start to feel sharper financial pressures leading into the holiday period, as gifts and parties eat into our savings or credit balance," says Matt Levey, CHOICE acting CEO. "Our research shows that cost of living pressures have been felt constantly through 2016, and that’s spilling over into subdued consumer sentiment."

More people have reduced spending on non-essential items in the past year, with 57% reporting tightening the belt, compared to 50% last December.

MYEFO: more consumer spending, less saving

The federal government's Mid-Year Economic and Fiscal Outlook (MYEFO), released this week, shows that the government expects household debt to do some of the heavy lifting when it comes to growing the economy. MYEFO predicts low interest rates and employment growth will lead to more spending on credit. The value of Australian household debt is currently a record 125.2% of GDP.

At the same time, savings are predicted to decline, "as consumption growth outpaces the modest growth in disposable incomes". In other words, look forward to spending more and saving less. The ratio of savings to disposable income in the economy has been sitting around 7.6%–8.1% for the past year, the lowest rate since the GFC.

"MYEFO's predictions about household savings match what we've been told in Consumer Pulse," says Levey. "Forty-one percent of respondents said they planned to cut back on their savings, up from 35% this time last year."

"But this isn't necessarily translating into higher consumer spending. In the next twelve months a majority of people say they are planning to cut back on discretionary and non-essential purchases: everything from holidays, big ticket household items, alcohol and tobacco, entertainment, and clothing."

Blue Christmas

Sluggish consumer price index increases in 2015–16 meant that wages grew slightly above the rate of inflation. The MYEFO predicts upticks in both measures, with the wage price index growing above CPI over the next four years. Increases in living standards are expected to follow.

However, Australian consumers do not share the government's optimism. A little more than one in five Consumer Pulse respondents believe the Australian economy is in good shape, the lowest positive rating since the survey began. Forty percent of regional Australians rate the economy as poor, compared to 34% in the capital cities.

Don't wake up with a credit hangover

One third of under-30s reported having dipping into their savings in the last year to make it to pay day, while a quarter had borrowed money from family or friends. People aged 30–49 were less likely to go to loved ones for money or to raid their savings, but one in five reported deliberately missing the due date on a bill, higher than any other age cohort. They were also more likely to live off credit cards after running out of money before pay day.

"The worst gift you can give yourself this holiday period is a credit card hangover," says Levey. "Keep an eye on your expenses and make sure you don't go overboard. Nobody wants to start 2017 drowning in high-interest debt."