Australia’s economic headwinds: A growing divide and looming crisis

From the editor’s desk

Once considered an economy that was strong and resilient at different times, the Australian economy is standing at the crossroads. For the first time in the history of the country, it now faces critical problems that threaten to exacerbate social cleavages and erode long-term stability. It has hit rock bottom: record-low household savings are at a 17-year low. It is also further exacerbated by a sixquarter downturn in GDP per capita. Inflation may have peaked at 3.5% by July 2024, hardly of any comfort to the already stretched population as greater inequality and unsustainable spending habits grow. The older, asset-rich Australians are moreor-less weathering the storm; the younger generations and lower-income groups are rapidly becoming more vulnerable to the whims of the economy. It is pertinent to realize that today’s economic decisions will shape Australia's future.

One of the most telling signs of current ills is the sinking household savings ratio. It is now just saving 60 cents for every $100 earned- an incredible drop from the 16% savings ratio Australia enjoyed during the 1970s. The national savings ratio is at an all-time low and only came out better than last year for the first time since 2007. The implication is clear: Australians are increasingly going to rely on debt to sustain their lifestylesthe precarious trend plumbs deeper systemic issues. It would be especially sobering for lowincome households, which are increasingly turning to credit cards as a means of making ends meet for everyday purchases. It's unsustainable financially and holds quite meaningful risks for the overall economy.

Another area of rapid concern is the growing divide among demographics. Older Australians, particularly those with financial assets, have benefited more than anyone else from rising asset prices as well as relatively stable incomes. Younger Australians, especially those with mortgage debt, are being squeezed by more stagnant wage growth as well as higher housing costs. It is increasingly apparent that economic policy over the past decades has been skewed very much towards asset holders putting a generation of younger Australians in precarious financial positions.

The most acute example is that of single women aged 50 plus who have often experienced the cruel twist of divorce. In such areas of life, for instance, many women in this age group have practically nothing to speak of in terms of secure financial situations -an emerging high cost of living and meagre retirement savings. The economic lives of such women therefore stand as a representation of a more serious problem within society-the differences in earnings between males and females, combined with the lack of support for those who are considered to fall between the cracks within welfare. A disturbing scenario is that aging of the population leaves Australia facing the stark reality that much of its citizenry has too little ready for retirement life, and this alone could place yet more strain on public finances.

Some historical context to the problem comes from comparisons. While it had stood at 16 percent in the 1970s, the household savings ratio had declined in the aftermath of financial deregulation which started in the 1990s. Household borrowing increased sharply in response to liberalization of the credit markets, a process that, regarding household credit, continued unabated until the early 2000s. The crisis turned problems into catastrophes; the GFC derailed savings ratios negative for the first time in memory. While the pandemic saw a short period when savings rebounded positively, as households were not that adventurous in spending, this could not be sustained. Instead, now it has reversed the trend, and today Australians are increasingly using their savings to cover the increasing costs.

Household expenditure provides a depressing picture. Expenditure is standing at -0.2%, obviously indicating that Australians are depending on their savings to sustain their current standards of living. This is troublesome because it is leading to rising household debt. In other words, volatility in economic conditions is created, and this would become yet another unstable system that could be knocked out by external shocks or downturns. And because global economic trends remain uncertain, Australia's reliance on household debt is a sure risk for long-term stability. Other concerns related to Australia are not just in numbers but in people. Dealing with intergenerational inequality needs policies that properly address the gap between different vulnerable groups. Thus, the economic system is at the risk of leaving behind low-income Australians and young people as well as older single women aged over 50 within this new economy. The unviability of the current expenditure practice cannot be put into words. The utilization of credit cards has risen and savings have eroded. These trends are unsustainable in the near term, but spell further economic instability over the longer term. As households continue to pile up further levels of debt and save less, it would be likely for a household debt crisis to assume higher risks. The policymakers are thus challenged by the need to arrest this trend decisively before it gets out of hand.

Solutions should hence be shortterm relief as well as long-term structural changes. Short-term measures should be policies that should relieve the burden of financial means on lower-income groups; targeted social welfare measures, for instance increasing housing, and access to low-cost living. That in itself would prove insufficient with regard to the causes of economic inequality and their depth due to the reason of change it demands itself. It would include much more fundamental reform in the collection of taxes and significant investment in public service by engaging the perspectives and needs of health and education.

As households continue to pile up further levels of debt and save less, it would be likely for a household debt crisis to assume higher risks. The policymakers are thus challenged by the need to arrest this trend decisively before it gets out of hand.

Economic stresses in Australia also possess a strong international dimension. Since the world economy is still unstable, Australia can by no means neglect any international forces that will impact its domestic economy. High interest rates, geopolitical tensions and volatile commodity prices may all press upwards on those economic headwinds. In that light, Australia must employ vigorous measures to regulate its economy, keeping it buoyant amidst uncertainty in the world at large.

The way forward won't be easy, but action must be taken. Indeed, in facing economic problems such as low savings in the household sector, and rising inequality, one has no choice but to focus on urgent policy initiatives. The policymakers need to take bold steps towards trying to address the underlying issues. Without meaningful intervention, demography will be the factor driving the widening of the economic gap, leaving a generation of Australians in an increasingly precarious financial landscape.