Australian Debt Numbers (at June 2022)

To try and get a handle on whether there's a 'credit problem' I thought a look at the straight aggregates over time might shed some light.

RBA aggregates are available on knoema with data up to June 2022 (sourced from RBA obviously).

The picture looks like this:

So, in aggregate total debt from 2008-2022 has lifted circa a trillion and a half Australian dollars (all numbers are local currency).

As usual on a first pass the actual numbers aren't important, it's 'trend' we're looking for. And there's no doubt the lift over the 'COVID period' is 'faster' than the trend post GFC (2009-2019). Let's call the lift over the 2009-19 period approximately 250 A$billion per 2.5 years. The lift for past 2.5 years (Dec2019-Jun2022) has come in at 430 A$billion.

So we know there is more debt in the system and that it has been rising faster. Hypothetically then, what's the impact of this? Debt attracts interest, the 'cost of servicing' debt is what everyone is worried about when they talk about 'debt burdens' getting too high. So a little academic exercise in the table above is to put a nominal number on the debt servicing costs @ 4% on past and present numbers, and then lift that by a single percent to see the difference. Can't stress enough here this is purely academic, it's simplistic in the extreme, but you gotta start somewhere :-) A 1% lift adds $A34 billion in servicing costs to total debt numbers we have as at Jun 2022 ($A3386B).

So roughly, if interest rates triple (estimates have interest rates finishing 2022 in the 2.75-3.00 % range, coming from 0.1% at the beginning of 2022) then the 'debt servicing burden' on the economy is about an extra $100 billion dollars (34x3=102) per year.

Yeah, well that's all very nice I hear you say.. but what does it mean?

Good point. Well, just dealing with what kind of scale we're looking at - we can say Australia's whole economy is worth approximately A$2,225 billion per year (ref: has GDP at 1542 US$billion per year). So, 100 billion represents circa half a percent of that. 'Consumption' is significantly less than GDP, say 60% (or A$1335B), and then 100 billion represents a 0.75% slice of that.

For a contra kind of view though lets look at inflation running at 6% - that 'discounts' our GDP by approximately A$133.5 billion per year all by itself..

On the numbers alone then, at aggregate, everything 'looks fine' - sure, a couple of percent of 'heat' is going to come out of the economy but on the face of it, 'business as normal' (and that's what our institutions are telling us). Of course aggregates hide all sorts of gremlins, and how this lands for various sectors and individuals is going to vary widely. At economy level a couple of percent, this way or that, doesn't sound much, but in fact our growth has only averaged a couple of percent a year for many years now, so a couple of percent can mean the difference between growth or no growth.

My opinion is that the RBA has no choice here. On rough numbers inflation looks like it will be more of 'a burden' to the economy than any increased 'debt servicing burden' from rising interest rates. And the RBA is tasked with dealing with the aggregates - any noise they make about homeowners, or individuals, is just 'marketing fluff', that's not their bailiwick, and I doubt they spend much time thinking about it.. (i.e. us).

They're certainly not going to win any popularity contests over the next couple of years because they only have two apparent choices: bad, or worse.