Payments deflate real-time recovery story

Ian Rogers

Gross payments volumes across the economy in April and May (and all year, really) portray a sobering version of the rebound celebrated in the quarterly national accounts.

The Reserve Bank of Australia’s timely, monthly collation of the volume and value of consumer and business payments suggests – not for the first time – that cheery assessments reliant on GDP growth readings and robust housing price appreciation skirt the insight in this rarely scrutinised payments series.

For May 2021, the RBA’s Real-time Gross Settlement Statistics' yesterday show daily average payments volumes fell 3 per cent to A$162.5 billion. This is 15 per cent below the daily average payments volume for March, and 20 per cent below the average volumes for the whole of the 12 months to March 2021.

The ABS National Accounts released yesterday show that gross domestic product rose 1.8 per cent over the March 2021 quarter, “reflecting the continued easing of COVID-19 restrictions and the recovery in the labour market”.

“The level of economic activity for the March quarter was 0.8 per cent above December quarter 2019 pre-pandemic levels, and has grown 1.1 per cent in through the year terms,” the ABS said in its summary.

With households focused on their present living standards rather than their overall financial situation, the household saving ratio declined from 12.2 per cent to 11.6 per cent over the quarter and, this ratio has roughly halved since peaking at 22.0 per cent in the June 2020 quarter.

For banks managing the abundance of liquidity in the financial system, this has translated into the rate of growth in retail bank deposits sagging to an annualised growth rate of around 3.5 per cent, less than one third the rate (as measured by APRA) over the last year.

In a coda to a speech to a resources conference yesterday, Brad Jones, head of economic analysis at the Reserve Bank, reflected on “some implications for the Australian economy in the period ahead”.

Leading off with the gloomier version of RBA thinking, Jones observed: “While it is encouraging that measures of global economic policy uncertainty have receded over recent times, it is at least possible that some Australian households and firms seek to repair their balance sheets for a considerable period, as occurred in a number of advanced economies after the GFC.”

Restating the ‘downside scenario’ for the domestic economy from the May Statement on Monetary Policy, Jones said this scenario “reflected a situation where private consumption and investment remained subdued in the years ahead partly due to lingering uncertainty and insecurity”.

“With households preferring to direct more of their income to strengthening their balance sheets, including by paying down debt, private consumption and investment would be weak. In turn, unemployment would remain above pre-pandemic levels and inflation would remain low over the next few years.

“And in countries that have been more severely affected by the pandemic than Australia, it could be the case that a high degree of caution lingers for some years.”

But there are "material differences between the current episode and past severe shocks that point to a brighter outlook in Australia,” Jones argued.

“First, the origins of the shock have been substantially different from rare disasters of the past.

“Restrictions on consumption contributed to the increase in household savings across income cohorts in Australia, and a similar pattern has been observed globally.

“Large scale disruptions of this nature distinguish the current episode from past global crises where private demand, and parts of the financial system, collapsed under the weight of years of accumulating imbalances involving too much debt and inflated asset prices.

“These same factors weighed on the post-crisis recoveries for years. But reflecting the unique nature of the COVID-19 shock, the recent experience domestically and abroad has been that economic activity has snapped back after restrictions have been lifted.

“Indeed the speed of the recovery in activity and the labour market in Australia bears little resemblance to past downturns. This should give us some hope that less economic scarring will result.