Aussies face crunch of debt and sickly wages

Central bank urges workers to demand raises

SYDNEY • Australians may soon be struggling to make ends meet.

With real wages going backward in the first quarter and the developed world’s highest debt- to- GDP ratio after Switzerland, consumers are setting aside less cash for a rainy day: their savings levels have more than halved in five years. Further intensifying the squeeze is a rising cost of living, with electricity prices climbing as much as 20 per cent in New South Wales state next month.

At stake is the economy’s trajectory: consumption accounts for more than half of GDP, and long- term weakness in spending will weigh on growth. As to ballooning debt, while the central bank can’t say how high is sustainable, it warns that the deeply indebted can be more sensitive to declines in income “and may respond by reducing consumption sharply.”

“We’re starting to see signs the consumer is looking to see where they can take cheaper options,” said Daniel Blake at Morgan Stanley in Sydney, who also notes a rare drop in privatehealth insurance participation. “There’s likely to be another meaningful slowdown in consumption.”

Australia’s household debt to GDP ratio has climbed almost 15 percentage points in four years, to 123.1 per cent in 2016, data from Bank for International Settlements show. Known as the central bankers’ bank, its annual report released Sunday said household debt outpacing GDP growth over prolonged periods is a “robust early warning” signal of financial stress.

At the heart of Australia’s problem: record- low interest rates. These have allowed home buyers to borrow vast sums in order to break into the Sydney and Melbourne property markets, where prices have about doubled since 2009.

Policy- makers are now worrying about some borrowers’ resilience.

The Reserve Bank of Australia noted in April that about a third of mortgage holders had either no buffer or not enough of one to cover a month’s worth of repayments. The most vulnerable tended to hold newer loans or come from “lower-income and lower- wealth households.” Moreover, it said al- most a quarter of borrowers were on “interest only” mortgages.

That’s prompted the bank regulator, supported by the RBA, to enforce measures to rein in riskier mortgages and strengthen lending standards. Australians have historically been able to load up on debt and then inflate it away through wage gains and rising consumer prices. But this time it’s different: their huge debt just remains huge.

Stagnant wages, meanwhile, are a problem confronted by a number of developed economies including Germany, the U.K., Japan and the U.S.

Down Under, it’s assumed workers who have lost highlypaid jobs in mining and associated industries have moved to less- well- paid positions. Jobs in health care, accommodation and food, professional services and transport accounted for most of the strong employment gains in the three months through May — industries that generally pay below-average wages.

Meanwhile, the economy shed better- paying jobs: the industries with the highest average weekly earnings are mining, utilities and finance, according to Citigroup Inc. Those sectors all cut positions.

But there’s also a distribution issue: the share of GDP going into workers’ pockets has slumped to a record low. Australia Institute research shows total compensation that includes wages, salaries, and pension contributions fell to 46.2 per cent of GDP in the first quarter, below the previous record low of 46.4 per cent in 1959.

These factors last week prompted RBA Governor Philip Lowe to take an unprecedented step — for a central bank chief — in urging Aussie workers to ask for bigger pay increases.