Aussie Debt Binge Meets Anemic Wages in Conundrum for RBA's Lowe

  • Accelerating debt ‘could be quite problematic,’ Governor says
  • Private wage growth slowed to weakest on record in 4Q

For 20 years Australians doubled down on debt, confident rising wages would inflate away the burden and grow their wealth. Their lucky streak may be coming to an end.

Reserve Bank of Australia Governor Philip Lowe’s acknowledgement of the rising risks can be seen in his determination to draw a line under a five-year easing cycle and avoid further escalating debt. But the horse may already have bolted: household debt has surged to a record 187 percent of income and data Wednesday showed private wage growth at 1.8 percent, an all-time low.

“If household borrowing keeps rising at the current rate or were to accelerate then I think that could be quite problematic,” Lowe said in Sydney, hours before the wage report’s release. “The risk that we focus on is, at some future point, households might decide they’ve just borrowed too much and then they, in response to some bad piece of news, really cut back a lot.”

A collapse in household spending would be damaging for the economy -- it accounts for more than half of gross domestic product. The RBA chief sought to balance the dangers by noting the current level of debt is sustainable given it’s been in a similar vicinity for about 10 years. But life was much different a decade ago: wages were rising by at least 4 percent a year and inflation was at 3 percent to 4 percent, helping erode debt faster.

Lowe gave a nod to this Wednesday, saying “many households are finding that their debt levels are not declining as quickly as they previously hoped.”

But there’s little sign of the binge slowing. Sydney property prices have risen 16 percent in the past year and auction clearance rates came in at a scorching 80 percent-plus in the past two weeks. Melbourne’s prices are up almost 12 percent and sales have similarly remained strong, suggesting Lowe’s task of navigating the economy is going to get tougher. 

Two-Speed Economy

One answer would be to tighten policy a little, but the RBA is setting one rate for two very different scenarios. Over in the mining heartland of Western Australia, the economy is moribund: unemployment is rising, house prices are dropping and businesses are going bust. It likely couldn’t sustain an interest-rate increase and could even do with more cuts.

Lowe has instead kept rates unchanged at a record-low 1.5 percent since he took the helm in September. He’s relying on higher commodity prices and a brighter global outlook as well as a diminishing drag on local growth from falling mining investment to tide the economy over.

But that growth is likely to be labor-light, because iron ore and natural-gas exports require limited numbers of employees. As a result, Australia’s job market is likely to see under-employment remain high and excess capacity continue, leaving little scope for faster wage growth.

Just as well that Lowe’s an optimist. He’s going to need very little to go wrong to successfully nurse Australia through this period of high debt and weak wage growth. His clear goal is to instill sufficient confidence in businesses and consumers to keep them spending and the economy ticking over.

Lowe could do with some fiscal support from the government -- he again noted today the lamentable state of Australia’s transport infrastructure. But while Prime Minister Malcolm Turnbull voiced support for such spending Tuesday, and acknowledged that it boosted demand, that’s unlikely to emerge any time soon given his government aims to repair its budget and save a AAA credit rating.

The upshot -- and just as in recent years -- is that much will be left on the shoulders of the RBA chief.

— With assistance by Kimberley Painter

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