Tough times are hitting Aussies amid the per capita recession

Many Australians are doing it particularly tough at the moment – something it is easy to lose sight of amid buoyant share, property and employment markets and a growing economy.

Just ask any small business how they are tracking at the moment and most will give you a fairly gloomy answer, one made tougher in an environment in which it is hard to employ good staff and to make ends meet.

Not all of the evidence of these tough times amid apparent plenty is anecdotal – there are hidden signs among the official statistics that add a lot of weight to the difficulties many Australians are feeling at the moment.

Home loans starting to hit the wall

One was carried in the minutes of a recent meeting of the Council of Financial Regulators, a group that includes the Reserve Bank, Treasury, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.

What the numbers showed was a lift in the number of hardship applications to the nation’s banks for relief from their home loan repayment plans.

They also noted that the rise in hardship applications had been “material” – regulator speak for “worrying and big enough to keep a close eye on.”.

The minutes of the council’s March 6 meeting show that while regulators believe risks to the financial system due to the pressure on households appeared contained “for the time being”, they needed to be watched carefully.

That doesn’t mean the difficulties are not very real and pressing for those going through them – just that they are not threatening the banking system at this stage.

Arrears and defaults on home loans fell dramatically during the Covid low interest rate period but they are reappearing now amid growing signs of financial stress in the household sector.

Hardship predates the official figures

It is important to note that such indicators rise with a lag, given that families try really hard to keep up loan repayments, making a hardship application the end of a difficult period rather than the beginning.

S&P Global’s latest quarterly measure of mortgage-backed securities also showed a lift in the proportion of loans in arrears, with most of those behind on their repayments all being in outer suburban areas with high proportions of first-time buyers.

The national accounts also show clear signs that large sections of the community are feeling the strain, even as the economy managed to squeeze out a 0.2% rise in GDP in the last three months of 2023.

The accounts also showed that Australians are tightening their spending as the impact of higher interest rates and persistent inflation bites, with data on savings also indicating increasing strains.

The accounts showed that while the economy might be growing, particularly with immigration running particularly, the underlying households are actually facing a fairly savage recession and fall in purchasing power.

Economy growing overall but masking a household recession

While gross domestic product (GDP) rose by 1.5% with four quarters of rises of 0.6%, 0.5%, 0.3% and 0.2%, per capita GDP actually fell 1% in 2023.

That marks a whole year in which households were effectively in recession, even though the economic growth figures showed the overall economy was still growing slowly.

Throughout 2023, overall economic growth was entirely due to population growth, specifically immigration.

Housing loan rates are still rising

With interest rates on mortgages effectively still rising as more households continue to be switched from very low fixed-rate mortgages to higher floating rates, the per capita recession is likely to continue, even if overall interest rates start to fall eventually.

While inflation is also falling slowly, that is unlikely to be happening fast enough to turn around those households that have already been in recession for a year.

The tougher household circumstances also show through in measures such as the rapid 2.4% fall in real per capita consumption – a sure sign that many families were slashing their spending to try to stay afloat.

All of this is worth keeping in mind as we continue to muddle through 2024.

Eventually, hard times tend to break through into the overall economy in ways that can be very unpleasant and it is likely that the enduring per capita recession of 2023-24 will not be any different.