Since 1990, household debt has risen from around 80 per cent of income to around 130 per cent. So household finances were badly stretched leading up to the middle of 2008. There has been very little change in ratio of total household net worth from post-war to 1990. But after 1990, there was a significant increase in household wealth in proportion to disposable income, i.e., we have more money to spend, and products cost less. This is then coupled with the fact that economy has been more stable since 1985, than in prior postwar recessions – recessions have been less frequent and also shorter and smaller. As our wealth has increased, we have saved less, because we don’t feel the need to save for a rainy day (because we believe that we will always have money). The optimism bias tells us that if times are good, we assume that times will continue to be good.
This is then combined with the fact that people have more individual debt than ever before; household debt in Australia has tripled since 1990 and accounts for around 150 per cent of households’ disposable income. In the UK it is even worse – in January 2009, outstanding personal debt was at £1,479 (AUD3,000) billion and rising by £1 million (AUD2 million) every 10.6 minutes.
So the first issue is that people are much more worried about outstanding debt than ever before. All of this has combined in one big mess where we are seeing is shifts in consumer behaviour; broadly speaking you could say that there is a continuum between three segments and potential responses to the GFC;
1, Those in immediate danger – people who have lost their jobs; who have seen their superannuation income disappear. These people have basically stopped spending – not only on luxuries, but on basics, on everything.
2. People who aren’t in direct danger, but know somebody who is, or are worried that they might be in danger in some way – they might have a large mortgage, large debts on their credit cards, or be employed in a precarious industry. They are going to spend money more carefully. These people will cut-back on luxuries and discretionary purchases. They might wait a bit longer for their next haircut, or put off on upgrading their TV set. These are the people who were most influenced by the marketing and manufacturing boom over the past 17 years.
These consumers were the targets of many of the marketers over this time – they are the conspicuous consumers. Marketers are partly to blame for this, as well. They have fuelled the debt crisis by offering people credit that they could not afford – and they have been excited by consistent, and significant growth. And our leaders are also to blame, because they have driven the choice bandwagon, which has meant that consumers believed that they were entitled to choose between 30 espresso machines, or 60 different mobile phones. They have also introduced economics in to the general conversation, and convinced us that the upwards of three per cent growth is the only way that the economy can operate.
3. And the third group are those who have piles of disposable income – the people who have no debts, have paid off their mortgages, to the point where all their income is disposable. In the short-term, what we will see from them is that they won’t change their behaviour dramatically, but they may cut back on the conspicuous nature of their consumer behaviour.
Since the Great Depression we have learned to make things better and cheaper – while exploiting people in developing countries and the environment. We are now seeing this come to a head – it is an interesting time, because as well as the economic crisis, we are also facing a dramatic environmental crisis, that was all put in train because we became good at making stuff cheaply, by exploiting the environment, animals, and weaker countries.
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So, some of the trends we are seeing or I predict we will see over the next twelve months include:
- A growth in “junk food” (or fast food) sales; ready to eat products that are high in fat, sugar and salt. Rather than a decline, people will shift their take-away to the chains – the one’s that provide the “best value” in terms of sugar and fat hits, and also provide a veneer of low-risk (in terms of delivering the “hit”). McDonalds sales, for example, have increased by around eight per cent in the past six months – while high quality restaurants are showing reduced clientele.
- Airlines will see a slow-down, particularly in the low price segments – price sensitive consumers will simply travel in other ways. And the low-price model is not sustainable without close to 100 per cent yields.
- The small-format, large discount supermarkets like Aldi will see an increase in business. This is an important issue – people will still need to buy food, but the type of food that they buy will change. Lower priced brands, even store brands are the ones that will benefit most. High-end grocers will struggle.
- We are likely to see people putting off grooming activities, such as hairdressing, facials, massages and waxing. I am even willing to go on record to say that we will most likely see negative growth in the Brazilian wax (perhaps with a movement to more permanent and potentially more dangerous grooming methods, such as laser hair removal).
- Manufacturers of technological products, including Apple and Dell computers, will see a slowdown, as consumers wait a bit longer to replace their current computer. Even the Apple Superstores are doing some discounting.
So, in the short-term, we will see people buying low price goods, or putting off services for a bit longer, e.g., instead of getting their hair done every six weeks, they will get their hair done every eight to ten weeks. It is likely that we will also see people not renewing or making the effort to get out of contractual arrangements that were based on inertia.
In the past, when things were going well, they ignored that their gym membership was being deducted monthly, because they convinced themselves that they would use it at some point. Now, we will see people actually cancelling these memberships, because the apathy has been influenced by their awareness of the GFC. For many people, membership of a gym will become a luxury or discretionary. So rather than one particular behaviour, we will see people adapting in different ways. Based on current trends, most people won’t be changing their behaviour dramatically, at least for the short-term. In general, people will engage a little bit more in their consumption behaviour, putting off decisions until they feel more confident.
What will lead to that confidence is the tricky one. I am always surprised as to the amount of coverage that is provided to economic news in the normal news bulletins. I think that if we start to see the media reporting steady rises in the stock market, then to some degree, people will start to believe that we are on our way out of the recession.
A big part of any recovery will be the psychology behind buying – if people believe that the sun is coming out, then they are more likely to spend. If they spend, then confidence will return to the market. Let’s hope, though, that any growth in spending is not fuelled by more debt, but by real savings and capital.