NAB economist warns of ‘the paradox of thrift’ impact

The psychological impacts of a tightening economic environment could exacerbate a drop in economic growth, National Australia Bank’s (NAB) chief economist, Alan Oster, has warned.

Speaking during a Commercial Broker Quarterly Economic Update webinar on Tuesday (13 December), Mr Oster highlighted that consumer and business confidence had started to fall in recent months as rising rates and cost of goods continue to increase.

During the webinar, the economist outlined that the major bank expects gross domestic product (GDP) growth to slow to less than 1 per cent during 2023 and 2024, respectively, down from its current level of 2.3 per cent.

The main reason for this will be slower global economic growth (as the powerhouses of China, the USA, and the UK all experience a drastic drop in economic growth, if not enter a recession) alongside rising rates especially as many mortgagors roll off their super-low fixed rate loans from next year.

While NAB expects the central bank will continue to increase the official cash rate (hitching by 25 bps in February and March and taking the cash rate to 3.6 per cent in early 2023), the economist highlighted that the effects of rising rates and changing monetary policy can take between 12–18 months to filter through to the economy.

In the meantime, he flagged that a key influence on the growth of the economy next year could be confidence, citing “the paradox of thrift”.

Mr Oster told broker viewers that he did not expect Australia to enter a recession next year (with the economy instead staying “very flat”) but warned that there was “no room for error”.

He explained: “I’m hoping that we avoid a recession, but I think the reality is going to be tough.

“The thing that’s really important is not that we’re expecting a lot of people to ‘fall over’ (and the central bank deputy governor has been saying that they won’t). The important question is how consumers behave in an environment where they’re worried that they might fall over.

“In economics that is what is called ‘the paradox of thrift’. Everybody gets thrifty, and the economy falls over because nobody’s spending. It’s like applied psychology. How will the consumer behave? 

“It’s this psychology of people sitting around saying: ‘I’m spending more than I’m getting [on the value of] my house’, for example. That’s gonna make them feel nervous. And that’s the one thing that I think is the issue moving forward.

“We’re worried that the consumer might be starting to withdraw a little bit of spending,” he said, adding, however, that Black Friday sales would have helped temporarily lift spending in the short term.

The focus on consumer confidence comes as new NAB data shows a stark drop in business confidence.

According to NAB’s most recent Monthly Business Survey (for the month of November), released on Tuesday (13 December), business confidence turned negative in November, falling below zero for the first time since December.

Moreover, the gap between actual business conditions and business confidence was found to be at a record level in the history of the survey with the exception of March 2020 (when the emergence of the COVID-19 pandemic saw confidence plummet).

For example, while business conditions fell 2 points to +20 index points, confidence fell 4 points to -4 index points.

This suggests heightened concerns about the resilience of the economy in the period ahead as inflation and higher rates weigh on consumers and global growth slows, Mr Oster said.

The bank survey highlighted a growing concern that the economy’s strength over 2022 is set to come to an end in 2023, with the survey showing that forward orders have softened from +14 in September to +5 in November, reflecting a more uncertain outlook.

“Overall, the survey suggests the economy powered through November with consumers still spending in the run up to Christmas,” Mr Oster said. 

“However, firms have become increasingly pessimistic about the future as they look ahead to a slowing global economy and a period of weaker consumption as inflation and higher rates weigh on households.

“Whether, and how soon these fears are realised remains to be seen however, and we will continue to monitor spending trends closely over coming months.”

The warning around the impacts of behavioural change comes as Westpac flagged a recent uptick in consumer sentiment. 

The Westpac Melbourne Institute Consumer Sentiment Index increased by 3 per cent, from 78.0 in November to 80.3 in December, with mortgagors particularly feeling more positive.

The index found that confidence among mortgagor respondents had risen 11.3 per cent in the month, compared to a 3.8 per cent rise for tenants and a 2.7 per cent fall among those who wholly own their property. 

This could partly be attributed to an expectation that the bulk of the interest rate tightening cycle is now “behind us”, with the latest survey finding that only half of respondents expect the RBA to increase rates by another percentage point over 2023 (down from 60 per cent in November and a peak of 73 per cent in July), which also resulted in a lift in the outlook for house prices from respondents.

[Related: ‘Ho, Ho ... oh no!’ RBA announces December rate rise]