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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Learn more about savings accounts

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
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  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up direct debits from a savings account?

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.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

What is a good interest rate for a savings account?

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 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.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

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.

What is the interest rate on savings accounts?

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

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

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 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.

How much money should I have in my savings account?

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.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.