“The US peaked at a bit over $US2 trillion [$3.14 trillion] of savings, or about 10 per cent of GDP. Our peak was at a similar level of savings as a percentage of GDP, but [US savings] have run down to around 1 per cent now,” he said.
Mr O’Neill said that because interest rates and inflation started trending up well before Australia, the US was months ahead of the trend that was about to play out locally.
He said the cliff was still coming, predicting the savings pool would continue to run down as rates remained elevated over the next six months and, after that, some households would struggle to adjust.
“You will get another six-to-12 months of more benign credit quality before it reverts,” Mr O’Neill said. “With everything going on with inflation, the consumer is somewhat vulnerable. The economy is somewhat vulnerable.
“It is just taking longer to play through because of the level of savings.”
The portfolio manager said banks had done well to be conservative and take out big provisions for potential loan losses, which would help them manage their business and borrowers through any downturn.
Still, he was underweight on the sector overall because credit growth was only moderate and competition still appeared to be crunching margins in mortgage lending.
Westpac Business Bank senior economist Pat Bustamante said some households were simply not making enough money to cover their expenditure. He pointed to RBA research from last year that said if the full effect of interest rates was passed on, about 15 per cent of households with variable mortgages would have a negative cash flow.
“Something is going to have to give,” Mr Bustamante said. “Households must adjust. The sector cannot keep running down deposits to fund spending.”
He said it was likely any future interest rates would have a “more potent” effect on household spending.
“If households want to maintain higher standards of living, productivity needs to increase. Increasing incomes and spending without productivity growth will only further fuel inflation. These adjustments will take time,” Mr Bustamante said.
