Nervous Households Sitting on Cash Slow Australia’s Recovery

(Bloomberg) --

Nervousness about jobs and the economy has Australian households sitting on their cash, either in bank accounts or simply at home, impeding an economic recovery.

Nearly one in every three households sees bank deposits as the wisest place to keep savings, a Westpac Banking Corp. survey on Wednesday found -- a six percentage-point gain in a year, and well ahead of riskier options like shares and property or just spending it. Meantime, the total value of A$100 notes -- Australia’s largest banknote -- in circulation jumped 14.1% in August from a year earlier, the fastest pace in 29 years.

Confidence is seen as the missing ingredient to unlock households’ cash stacks and drive a consumption-led recovery. While sentiment has showed some improvement, worries about job security in an environment of rising unemployment may well keep this cash idle.

“Australians continue to hold extremely risk-averse preferences,” Bill Evans, chief economist at Westpac, said on the release of the consumer-sentiment survey. “There is still extreme nervousness about the near-term economic outlook.”

The Reserve Bank of Australia attributed households’ increasing precautionary holdings to concerns about the soundness of financial institutions. That’s despite the fact that deposits of as much as A$250,000 ($181,000) are government-guaranteed and -- unlike the global financial crisis -- this one didn’t originate in the banking sector.

Aside from bank liquidity fears, the fall in interest rates on savings accounts to as low as 0.15% has reduced the cost of holding cash.

Australia’s pandemic stimulus included cash transfers to households and allowed them to tap their pension savings. With limited spending options during the lockdown, the household savings ratio soared to 19.8% in the three months through June -- a 46-year high -- and would have been nearly 25% if pension-fund withdrawals were included.

On top of that, the government is working on plans to fast-track income tax cuts in the budget next month. Changes are already legislated to come into effect in mid-2022 and mid-2024, but may be brought forward to boost consumption.

Yet much of this cash likely won’t be spent until the job market strengthens. Unemployment expectations, measured with consumer sentiment, remained 4.2% higher than a year ago, echoing a National Australia Bank Ltd. recent survey that suggests firms are still cutting staff.

“I am skeptical that consumer confidence can hold onto these recent gains, while the Melbourne/Victorian restrictions will take longer than expected to ease,” said Diana Mousina, senior economist at AMP Capital Investors Ltd. “Lower confidence is negative for the consumer spending outlook -- despite the strong gains in retail recently -- and also means that the savings rate should continue to be high.”

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