uploads///Consumer credit in Australia is burgeoning

Why Consumption Will Remain Soft in Australia

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Dec. 4 2020, Updated 10:52 a.m. ET

3. Australia has an over indebted consumer.

One factor which could hold back the non-mining portion of the economy: too much consumer debt. Much like US consumers, Australian consumers are in the process of repairing their balance sheets. As this process unfolds, consumption will remain soft.

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Market Realist – Consumption will remain soft due to the indebted Australian consumer

The graph above shows the consumer debt in Australia over the last twelve months. Consumer debt in Australia has been increasing, and has outpaced the GDP. In October 2014, consumer credit was a little shy of A$ 2.24 trillion. Over the last twelve months, consumer credit has grown by ~5.5%.

As the debt levels in the Australian households increases, the propensity to spend would reduce. This will affect consumption. Consumption makes up close to 73% of the Australian GDP. This could adversely affect Australian GDP and, in turn, Australian stocks (EWA).

Consumption will remain soft in other developed markets (EFA) as well–especially in Europe (EZU) and Japan (EWJ). The overall GDP growth remains weak in both these economies. The main reason why consumption could remain low in Japan is because of elevated consumption tax. Within the developed markets, U.S. (SPY) seems to be the most resilient at the moment.

Read the next part of the series to know why Australia is still a good long-term bet.

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