• The Reserve Bank of Australia (RBA) is hoping Australian will spend their extra cash to get the economy roaring again.
• Australians have accumulated billions of dollars in extra savings, amounting to 12% of incomes.
• If households can be encouraged to spend it, Australia could overshoot forecasts and wages could grow substantially for the first time in years.
• Visit Business Insider Australia’s homepage for more stories.

Bracing for a recession that was over almost as soon as it began, Australians have money to burn.

These bolstered savings accounts will be key to Australia’s recovery as the country begins to spend again, according to the Reserve Bank of Australia (RBA).

Publishing its monthly monetary policy statement on Friday, the central bank revealed it is expecting the billions of dollars of extra cash will begin to flow through the economy in the coming months as Australians regain their confidence.

“Household wealth has increased strongly of late, mostly because housing prices have risen, but also because households accumulated an unusually large amount of additional savings out of income over 2020,” it said.

In June, Australians had saved an average 19% of their income as recession fears took hold. This extra buffer was gradually blown to 12% by December. Given the average before the pandemic was closer to 1%, it gives most households plenty of extra cash to blow this year.

While all Australians saved more during the period, the largest savings were understandably pocketed by those who could afford to, the top 40% of income earners.

“The rate of household saving is expected to decline further over the coming year as uncertainty recedes and opportunities to consume become more available. Some households may also opt to draw down on a portion of their savings accumulated over 2020,” the RBA said.

Spending could kickstart a roaring recovery

The RBA suggests these extra savings could translate into an unusually strong spending spree which would in turn see the economy bounce with greater momentum than forecast.

“In this upside scenario, the unemployment rate declines and wages growth rises at a faster pace… inflation picks up to around 2.75% by the middle of 2023 and remains on an upward trajectory at that point.”

A virtuous cycle, the RBA anticipates rising wages will again encourage Australians to keep spending, lifting Australian growth even higher and pushing unemployment as low as 3.75%.

This naturally is the best case scenario. The RBA’s base forecasts have the economy growing at a robust, albeit less impressive, rate, with unemployment to hit 5% by December and 4.5% by Christmas next year. Under this scenario, the economy is expected to expand 4.75% this year and 3.5% in 2022.

“Household cautiousness is a key area of uncertainty for the Australian economy,” Indeed Asia-Pacific economist Callam Pickering said.

“We don’t yet know whether households will simply move on from the pandemic – returning to their spending patterns before COVID – or whether the recession will have a lingering impact. With household spending accounting for more than half the Australian economy, that decision will play a pivotal role in our economic performance, particularly now that JobKeeper has been removed.”

Closed borders are a risk to the economy

There are a few variables worth watching to see if Australia will hit those targets. The first will be a successful vaccination rollout that will both prevent large future outbreaks and the consequent restrictions, as well as enable international borders to reopen.

An open Australia is indeed another major factor, with the RBA noting an absence of migration will see population growth fall to 0.2%, its lowest rate in 100 years. Beyond that, closed borders put Australian services like tourism and education at risk.

A lack of international students and holidaymakers meanwhile will create labour shortages in Australia’s accommodation, hospitality. administration, support, and agricultural industries.

Curiously, the Commonwealth Bank thinks the RBA might be sending the federal government “a subtle message”, making much of a line in its statement about lower migration leading to higher wages.

“Namely that the RBA has more chance of achieving their objectives of full employment and inflation sustainably within the 2‑3% target band if [net overseas migration] does not return to its pre‑COVID‑19 levels when the international borders are reopened,” economists Kristina Clifton and Gareth Aird said.

For now, those are longer term concerns. Ahead of Tuesday’s Federal Budget, the Morrison government will know it simply needs to get Australians spending.

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