Australians Have So Much Debt They're Becoming Afraid to Spend

By James Glynn Features Dow Jones Newswires

Data analyst Ben Reid recently took out a 25-year loan on a home outside Sydney despite a frothy housing market in Australia, believing in the market's staying power. Payments on the $500,000 mortgage will consume about half his take-home pay.

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"I'd like a new car in the next couple of years but not sure where that cash will come from," said Mr. Reid, who is married with a 2-year-old son.

Big personal debts and spending worries like Mr. Reid's are a gathering storm over Australia's economy, threatening a 25-year streak without recession. Growth rose an anemic 0.3% in the first quarter, Australia's statistics bureau said on Wednesday, putting annual growth on track to be the weakest since September 2009.

Consumer spending has helped to cushion a deep downturn in mining investment when commodity prices slumped a few years ago. Consumption accounts for more than half of Australian GDP growth, of which nearly a third is retail sales.

But much of that spending is from borrowed money rather than from savings or higher wages. Australia's savings rate fell to 4.7% in the first quarter, a 10-year low.

As a result, Australian household debt has risen to a record 212% of income, according to the latest available data from the Organization for Economic Cooperation and Development. That's the fourth-highest globally after Norway, the Netherlands, and Denmark, and higher than the U.S. peak of 143% just before the 2007 global financial crisis.

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Now, as consumers bump up against the limits of their credit, that debt is biting into their spending, economists say.

Retail sales in Australia have fallen or been flat for three of the past five months, the worst conditions in years. Wage growth is the lowest on record, according to government data going back nearly two decades.

"Australia is decoupling further from the global recovery, with the consumer facing a cash flow and credit crunch," Morgan Stanley analysts said this week.

Signs of stress are growing on Main Street. A spate of retail bankruptcies since January has included shirt-sellers, shoe shops and fashion clothing chains. Among them was the Australian franchisee of U.K. retailer Topshop, which only set up shop here six years ago. The chain had nine stores, an online shop and space in 17 department-stores making around A$90 million in annual revenue when insolvency specialists took charge on May 24.

Gerard Toweel, who manages a vendor of musical instruments south of Sydney, Guitar World, said his business has stopped expanding and hiring as sales slow. "I wouldn't be surprised if the economy slides into a recession," Mr. Toweel said.

At a policy meeting on Tuesday, Australia's central bank said it was concerned that poor wage growth is crimping consumer spending and said that scenario is likely to persist.

A downturn in consumer spending risks undermining the government's budget projections released just weeks ago. After a decade of budget deficits, the government projects a surplus in the coming years with aid from rising wages. Many economists thought that outlook was overly optimistic.

Failure to meet the surplus targets could lead to Australia losing its AAA sovereign credit rating, which would drive up borrowing costs for federal and state governments, and the country's big banks.

To be sure, recent softness in consumer spending may reflect temporary factors, such as a cyclone that left a trail of destruction in eastern Australia in March.

But many economists aren't convinced that weak GDP growth will be short-lived, saying record-low wages growth and the rising debt burden are the source of the spending slowdown.

"The retail sector is verging on recession," said Josh Williamson, senior economist at Citigroup.

The real-estate sector is a top concern.

Low interest rates led many households to bet on property, often taking bank loans that required no down payment on a house. House prices in Sydney and Melbourne, the nation's two biggest cities, rose 11.1% and 11.5% in the year through May 31, according to an analysis by data company CoreLogic.

Now, as the U.S. leads the world in shifting to a cycle of rate increases, ratings firms and economists worry those bets could sour in Australia.

"You're second guessing whether you've spent too much over the weekend and weekly grocery shop," said Mr. Reid, the data analyst. "As much as we're aren't crippled at the moment, the uncertainty of what could happen always makes you double think."

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

June 07, 2017 05:36 ET (09:36 GMT)