Resilience, risks and the RBA
The Financial Stability Review highlights stability in households, businesses and banks, despite challenging conditions.
The latest Financial Stability Review published by the Reserve Bank of Australia (RBA) highlights that key parts of the Australian economy have been resilient against a softening backdrop.
The half-yearly report provides the Bank’s assessment of the current state of Australia’s financial system and potential risks to financial stability.
Despite continuing cost of living pressures, and including higher interest rates, the RBA has flagged that the majority of households are still managing to meet debt payments and essential expenses. The strong labour market has helped here, but households are also making necessary (if not ideal) adjustments to prioritise essential spending. This includes continuing to cut back on discretionary spending and drawing down further on existing savings buffers. The RBA flags that the share of mortgage holders who are behind on their mortgage payments is actually below the level seen just prior to the pandemic.
However, while widespread defaults are considered unlikely, some 5% of variable rate owner occupier mortgage holders are facing total household costs greater than their income. Current RBA forecasts predict that around 90,000 households will be in negative cash flow come the end of the year. Thankfully, more than half of these households currently have enough in savings to cover mortgage payments for at least six months, and some respite is expected for mortgage holders when the revamped Stage 3 tax cuts come into effect from 1 July (alongside the possibility of interest rate cuts in the second half of the year).
Chart 1: Banks’ loans 90+ days past due (share of loans by type)
Source: RBA Financial Stability Review March 2024.
The RBA’s outlook for businesses is also relatively stable. The Review flags that, though financial stress is rising, broad-based stress across the corporate sector is unlikely given robust business balance sheets and higher than pre-pandemic level cash buffers for most larger listed companies. Most businesses are also reporting profitability around pre-pandemic levels, while the share of businesses with severely overdue trade credits is well below the average from the second half of the 2010s.
The Review also highlights the strength of Australia’s banking sector, with all our regulated banks having capital buffers significantly larger than their minimum regulatory requirements. Australian non-bank financial institutions are also very stable compared to international equivalents – superannuation funds in Australia, for example, generally operate with low leverage and do not have returns that they are obliged to meet, unlike pension funds. This means that there is little risk of financial services being interrupted, even if the economy was hit by a severe, but plausible, economic downturn.
However, a key risk flagged by the Review comes from overseas. Risks to global financial stability remain significant, including further weakness in the Chinese property sector, deterioration of global commercial real estate markets, and potential volatility in financial asset prices.
This will be on the RBA’s radar in upcoming Board meetings. The Bank will also be keeping an eye on Australian economic data releases, which have been somewhat mixed recently. Population data was stronger than expected, while retail sales have remained largely flat (with an All Too Well bump in February from Taylor Swift’s Eras tour).
Labour market data will be particularly important after an unexpected fall in the unemployment rate in February. However, job vacancies fell by 6.1% in the three months to February 2024, supporting the general concensus that the labour market is softening. It’s expected to weaken in the coming months, as elevated levels of migration continue to increase the supply of workers while demand falls, which may put additional pressure on households.
This newsletter was distributed on 3rd April 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Chris Bates, Graduate and Michelle Shi, Senior Economist at Deloitte Access Economics
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