Sep 21 2020
The savings rate among Australian households has surged in 2020, as a collapse in consumer sentiment has driven consumers to retain cash and cut back on retail spending. In 2019-20, household savings as a share of gross disposable income reached a high of 7.9%, relative to only 2.7% in the prior year. At the same time, Australian household indebtedness is among the highest in the world, with the ratio of household debt to assets expected to surge in 2020-21, to total 21.1%.
Several factors have contributed to the increased savings rate of households. ‘The largest component of household expenditure is rent and other housing costs such as mortgages. Rent and mortgage relief provided by landlords and banks since April 2020 has constrained spending in this area, which accounts for 20% of total household spending,’ said IBISWorld Senior Industry Analyst, Matthew Reeves.
Spending on recreation and culture declined by 15.7%, as COVID-19 restrictions have forced event cancellations and forced consumers to remain at home. Spending on health also declined by 20.2%, as people avoided medical premises for fear of infection. State and territory governments have also heavily restricted the ability of hospitals to carry out elective surgeries.
‘The COVID-19 pandemic exacerbated an already weak trend in spending, which had been slowing for some time. Household consumption rose only 0.1% in the September quarter of 2019, which up until that point was the worst performing quarter since the height of the GFC,’ said Mr Reeves.
A major contributor to growth in household savings has been the Federal Government’s JobKeeper wage subsidy policy, and the increase in welfare payments under the JobSeeker scheme. To date, over $50 billion has been spent on these schemes combined. As a result of this unprecedented fiscal support, household income has increased while the national unemployment rate jumped from 5.5% in 2019-20 to an anticipated 8.4% over the course of 2020-21. Real household disposable income rose 3.4% in 2019-20, its highest rate of growth since 2010-11.
The COVID-19 pandemic may also have resulted in a higher household savings rate because of the steep decline in the share market and other assets such as housing. ‘Households rely on their savings to fund consumption post-retirement, particularly since the advent of widespread superannuation, they may be saving more to restore their wealth,’ said Mr Reeves.
Household spending is expected to recover, provided that no significant new waves of infections are reported across the country. As the local economy continues to open up, especially in Victoria, the savings rate is likely to drop from the highs seen in the June quarter. However, as with the post-GFC recovery, savings are likely to remain at elevated levels for at least the next three years. Consumers are likely to spend cautiously as they did after the GFC.
Consumer spending patterns will be driven by the lasting effects of the virus, which are expected to remain until a successful vaccine is produced. As more people return to offices and schools, pent up demand will boost the Clothing Retailing and Footwear Retailing industries in the short-term. Growth in these industries is expected to rebound by 2.6% and 5.8% respectively in 2020-21.
With international travel restrictions likely to remain in place for the foreseeable future, domestic holiday spending is anticipated to increase, benefiting a wide array of industries, including Serviced Apartments, Fuel Retailing and Caravan and Motorhome Rental. For example, while overall revenue in the Serviced Apartments industry is expected to fall by 9.1% in 2020-21, revenue from domestic leisure travellers is forecast to grow by 6.7%. Motor vehicle sales collapsed in August 2020, falling 28.8% compared to the same time last year. While the Stage 4 lockdown in metropolitan Melbourne exacerbated this decline, sales were down in every state. However, as more people head back into their offices for work, greater risk averseness around public transport will likely boost sales of cars, as well as accessories, road tolls and fuel.
Many people will likely continue to work from home, which is expected to keep spending on home office products at elevated levels. This trend will create longer term benefits for industries such as Online Household Furniture Sales, which is expected to grow at an annualised 8.2% over the five years through 2024-25.
Online consumer activity has grown substantially during the COVID-19 pandemic. Increased activity includes spending on both discretionary items such as entertainment and non-discretionary items such as food. While prompted by government lockdowns, online shopping is likely to remain at these new highs, with the trend towards greater online shopping already present. However, this shift away from traditional bricks and mortar retail is likely to be a compositional shift and not affect the household savings ratio.
IBISWorld reports used to develop this release:
- Clothing Retailing in Australia
- Footwear Retailing in Australia
- Serviced Apartments in Australia
- Fuel Retailing in Australia
- Caravan and Motorhome Rental in Australia
- Online Household Furniture Sales in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647