Household debt a threat to Australia’s economy

The governor of the Australia’s Reserve Bank says it is difficult to ignore the risk of rising household indebtedness in Australia, warning record-high household debt levels have started to affect spending. Dr Phil Lowe has said further increases in indebtedness could make household balance sheets more fragile, and if households soon decide they have borrowed too much, they may cut back consumption “sharply”, hurting the economy and employment.

Speaking at theAustralia-Canada Economic Leadership Forum Lowe said the outlook for Australia’s economy seemed relatively positive, with growth expected to pick up to 3% over the next two years, inflation tipped to rise above 2%, and the unemployment rate likely to remain steady. Lowe said the ratio of household debt to income was at a record high – at 189.6% – and there were signs it was starting to affect spending.

“Households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination. Reflecting this, our latest forecasts were prepared on the basis that growth in consumption was unlikely to run ahead of growth in household income over the next couple of years. This interaction between consumption, saving and borrowing for housing is a significant issue. We are still learning how households respond to higher debt levels and lower nominal income growth.”