Rich but not content

At the height of Australia’s pre-GFC boom – think 2006 and 2007 – many economists liked to talk about the impact on the economy of the “wealth effect”.

The idea was simple. As property prices and share prices rose, the value of household assets went up. Households felt rich and they rushed out to fill their homes with new televisions, new cars and other baubles. Consumer borrowing and spending were high and business (particularly retailers) were happy.

Makes sense, doesn’t it? And no surprise that when the GFC struck and shares and house prices went south, we felt something like a reverse wealth effect. Spending dried up, households reduced their debt levels and everyone felt that little bit poorer.

From everything we see and hear in the non-mining economy, it would appear that the “reverse wealth effect” is still with us. Savings levels have increased, households have been steadily paying down debt (and still feel worried about meeting bills and mortgage payments) and retail sales have flat-lined.

But new data from investment bank Credit Suisse suggests we’ve got no reason to feel this way at all.

The bank’s second annual wealth report shows Australia has the second-highest average wealth level in the world at $US396,745 per person, just behind Switzerland which leads with $US540,010.

Even more impressively, Australia’s middle class is world beating. According to the Credit Suisse data, the mid-point of its sample suggests a median level of wealth of $221,704 – the highest in the world.

Now, there are a few wrinkles with this data. Unlike many other surveys of wealth, Credit Suisse does include the family home in its figures. Given that many believe that house prices are set to fall, this may be seen to inflate the total wealth figures. The counter to this is that Credit Suisse have adjusted to household debt, theoretically any housing-related bias should be somewhat reduced.

In my opinion, the figures reinforce what a strong position the Australian economy – and Australian households – are in.

But the fact that we are not seeing even small signs of any wealth effect does suggest that the average Australian household remains extremely anxious about what’s coming around the corner. Households are taking what they see as the prudent option, keeping spending to a minimum and reducing debt where possible.

Sensibly, but as Alan Kohler pointed out yesterday, it’s a touch worrying if everyone around the world stops spending and starts saving at the same time. That would depress global demand and lead inevitably to a spike in unemployment which could eventually make its way down to Australia. This is why we need the situation in Europe sorted quickly, before economies around the world start to seize-up even further.

Interestingly, the Credit Suisse report doesn’t predict this and is extremely positive about the future, predicting wealth will jump by 50% in the next five years to $345 trillion.

While that is led largely by growth in emerging markets in Asia and Latin America, it does suggest a global recovery and perhaps even a re-emergence of the wealth effect.