The Reserve Bank of Australia (RBA) has warned that household debt is at record levels, which could be disastrous if the global economy dips.
Household debt percentage – the amount of money that all adults in a household owe to a financial institution as a portion of disposable income – is at 185 per cent in Australia, according to the RBA.
This figure is up from around 70 per cent in the 1990s and 64 per cent in 1988.
In a speech to the Committee for Economic Development of Australia (CEDA), Reserve Bank Governor Dr Phillip Lowe said Australia needed “adequate buffers in place to deal with future shocks wherever they come from”.
“[It is] unlikely to be in the public interest — given projections for the economy — to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term.”
Dr Lowe warned that Australia’s budget deficit and debt levels had moved higher, with net debt expected to peak in 2017/18 at 19.2 per cent of GDP, and a balanced budget not expected until 2020/21, he said.
“Importantly this means that fiscal policy still retains capacity to support the economy in difficult times. But this capacity is less than it once was,” Dr Lowe said.
“We have a smaller buffer than we once did and a smaller buffer means fewer options.”
However Dr Lowe said the RBA remains positive on the Australian economy, anticipating economic growth to remain in line with expectations next year, before picking up in 2018.
The RBA said inflation remains low, and expects inflation will return to average levels over the next few years.
“We should also take some comfort that our system retains buffers against future shocks,” Dr Lowe concluded.
“Strengthening these buffers makes sense in the uncertain world in which we live.”
– with ABC