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As Australia records its largest recession, households savings jump threefold: ABS

As Australia records its largest recession, households savings jump threefold: ABS

Australian households have met the largest recession since records began 61 years ago by creating a savings bunker three times greater than usual, according to newly released data by the nation’s statistical agency.

The Australian economy entered a recession in the June quarter of 2020 with gross domestic product (GDP) falling 7 per cent, the Australian Bureau of Statistics has revealed. 

“Our record run of 28 consecutive years of economic growth has officially come to an end,” Treasurer Josh Frydenberg said.

“The cause: a once in a century global pandemic. The effect: a COVID-19 induced recession.

“Behind these numbers are heartbreaking stories of hardship being felt by everyday Australians as they go about their daily lives.”

Australia is in a recession ABS.JPG
The 7 per cent contraction is the steepest in recorded history -- stretching back to 1959. Previously, the largest recession on record occurred in the June quarter of 1974, when the GDP contracted 2 per cent during the oil shock crisis. 

The Reserve Bank of Australia compared it to the recession experienced after The Great Depression, almost a century ago.

The 7 per cent contraction in the June quarter followed a 0.3 per cent contraction in March, and comes after the government spent $55 billion in subsidy payments -- such as JobSeeker, JobKeeper, HomeBuilder and more -- to encourage consumer spending, lower unemployment and curb the brunt of a recession.

Savings go up, but the lack of spending hurts

The air of uncertainty posed by the COVID-19 pandemic has led to households spending less and saving more, the ABS data reveals. Over the June quarter, the household savings to income ratio increased to 19.8 per cent -- up from 6 per cent over the previous quarter.

Treasurer Josh Frydenberg compared it to the savings cushion people prepared during the Global Financial Crisis (GFC). 

“If you look back at the GFC, there was 10.9 per cent,” he said. 

“This is a reflection of the caution in Australian households but also the fact that the restrictions mean that they can't go out and consume. 

“This savings ratio was obviously high today but it will be important in the economic recovery, as people use their balance sheets to spend as we come out of this crisis.”

Household income to savings ratio ABS.JPG

The drop in spending contributed to the contracting economy, the ABS said, but it in turn was brought about by an increasing unemployment rate, lower incomes and a drop in work hours

Hours worked fell by a record 9.8 per cent, the ABS said, far outpacing the 2.5 per cent decline in wages subsidised by the federal government’s JobKeeper payments. 

The $31 billion investment in JobKeeper was more than all previous employment subsidies combined, the ABS said.

Social security payments -- such as JobSeeker and other government initiatives -- rose to a record 41.6 per cent, due to people losing their jobs or having their work hours slashed.

As patronage falls, businesses suffer financially

A fall in spending led to 7.9 per cent detraction from the government’s GDP balance sheet, but these figures tell the worst of the saga as a recovery is already underway, Mr Frydenberg said.

“As restrictions were gradually eased over the June quarter, the recovery began to take shape,” he said.

“Consumer confidence had increased for nine consecutive weeks and has now recovered 70 per cent of its fall. Business confidence has recovered nearly 80 per cent of its fall.” 

The tightening of household expenditure by 12.1 per cent largely contributed to the loss in spending, the ABS said.

The services industry -- including transport services, operation of vehicles and hotels, cafes and restaurants, among others -- experienced a fall in spending of 17.6 per cent, the ABS said. 

Trade also suffered due to travel and tourism restrictions, they said. About 2.4 per cent less goods were imported into the country due to a fall in consumption and a softening in demand. 

The impact was stronger on services, they said, with imported services falling by 50.5 per cent and exports taking an 18.4 per cent hit.

Offsetting but a fraction of the losses were modest gains in public demand of 0.6 per cent, the ABS said. This was driven by health related spending by state and local governments, and a rise in defence spending due to an increase in personnel deployments. 

All of these ripples had a pronounced effect on the government’s balance sheet, the ABS said. Whereas the general government net saving was $1.2 billion in the March quarter, it fell sharply in the June quarter to a loss of $82.6 billion.

The ABS boiled this down to a record $55 billion in subsidies being paid by the government, combined with a precipitous fall in taxable income.

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Fact Checked -

This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.



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What are the two types of NAB locked savings accounts?

With a locked savings account in NAB, you can earn bonus interest and learn financial discipline. NAB offers two types of locked savings accounts, each with their own terms and conditions.

The NAB Reward Saver account pays a variable base interest rate of 0.05 per cent per annum and a bonus interest of 0.55 per cent. You’re eligible for the bonus if you make a minimum of one deposit on or before the second last banking day and have no withdrawals in the month.

Meanwhile, the NAB iSaver account provides 0.05 per cent as the standard base interest rate and a fixed bonus margin of 0.55 per cent during the first four months from the date of opening the account. You can park your cash in the account and enjoy unlimited monthly transfers between linked daily bank accounts without impacting the interest rate.

What is an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

What is a Westpac locked savings account?

The Westpac locked savings account (also known as "Westpac Life") can help customers reach savings goals faster through bonus interest. Customers receive 0.2 per cent standard base interest with a variable bonus rate of 0.35 per cent when the closing balance at the end of the month is higher than the opening balance.

There are some conditions to earn the bonus interest on Westpac's locked savings account, though. First, you’ll need to increase the balance each month either through a deposit or not making any withdrawals, and then link it to a Westpac Choice account and make at least five eligible payments using your debit card. Please consult your bank as to what an eligible payment is. 

Can you have multiple ING savings accounts?

Yes, you can open up to nine accounts with ING at any particular time. If you’re saving money for various goals, such as buying a car or taking a holiday, you can name each of your multiple ING savings accounts differently.

To get a Savings Maximiser account, you’ll need to deposit more than $1000 every month and make at least five additional purchases. If you also want to grow your savings, from 1st March 2021, you can earn up to 1.35 per cent per annum variable interest on one account with a balance of up to $100,000 when you also maintain an Orange Everyday account.

With ING, multiple savings accounts can help keep track of all your savings goals. All the accounts offer flexible withdrawals where you can withdraw as low or as high as you want without impacting your earning interest rate. However, you can only earn the bonus interest on one account. To apply for a Savings Maximiser account, you can visit ingdirect.com.au.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

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As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

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Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

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A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

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A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

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How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

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It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.