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Jul
11
2009

Our Country’s Balance Sheet

Household wealth slides to 3½-year low

Financial accounts

•   The financial wealth of Australians stands at just over $36,000 – a 3½ year low. The recovery in share markets should ensure that wealth levels stabilise in coming quarters.

•    Company balance sheets have strengthened over the March quarter with a sharp fall in liabilities. Company Net Assets stand at $42.9 billion – the highest reading in two years.

Foreign (net) purchases of Australian shares amounted to $20 billion in the March quarter. And the share of Australian listed shares held by foreigners has soared to a 12-year high of 41.9 per cent.

What does it all mean?
•    The global turmoil in financial markets over the last 18 months has resulted in Australian households recording the biggest slide in financial wealth in recent times. The latest figures show that the average Australian has lost almost $23,000 since wealth levels hit record highs just 18 months ago. The net value of financial wealth held by the average Australian stands at just over $36,000 – now back to levels that existed around three years ago.

•    While household wealth levels continue to be eroded, company balance sheets have been strengthened over the March quarter. The high cost of borrowing and the unpopularity of high gearing levels have seen domestic companies pay down debt significantly, with liabilities falling by almost $11 billion in the quarter. Importantly net assets stand at the highest in two years – a result that should give investors a degree of confidence in domestic companies.

•    Foreign investors have become more prominent investors in our companies. At the end of the March quarter, foreigners owned almost 42 per cent of the companies listed on the Australian sharemarket, the highest share in 12 years. And in the March quarter alone, foreigners made over $20 billion in net purchases of Australian equities. The strength of Australian companies together with the cheaper Australian dollar no doubt have both acted as strong drawcards for foreign investors.

•    Importantly the slide in wealth is expected to ease in coming quarters. The almost 30 per cent rally equity markets  in recent months, coupled with low interest rates and government handouts should ensure that wealth levels start to stabilise. Importantly the pickup in business and consumer confidence will help to support activity and spending levels in coming months.

•    The volatile global environment has seen a rush to more safe haven assets. With a record $1.5 trillion in notes, coin and bank deposits being held in the March quarter. The high level of money in cash could lead to a flood of money flowing into other asset classes once risk tolerance improves.

What do the figures show?
•    The net financial wealth of Australian households fell in the March quarter for the sixth consecutive quarter to a 3½ year low.

•    Financial assets of households (such as shares, bank deposits) fell by $23.6 billion or 1.1 per cent in the March quarter to a two-year low of $2,093 billion. Financial liabilities of households grew by $15.5 billion or 1.2 per cent to a record $1,306 billion.

•    Overall, net household financial wealth (assets less liabilities) fell by 4.7 per cent or $39.1 billion to $786.6 billion at the end of March. Over the past year, financial wealth has fallen by 24.9 per cent – the second biggest decline since records were first maintained in 1988

•    Net household wealth per capita fell from $38,148 to $36,183. Wealth is down 26.3pct on a year ago and only up 10.1pct over the past decade.

•    The household debt to liquid assets ratio rose by 3.2 percentage points to a record high of 153.9 percent in the March quarter. The ratio shows that households do not have sufficient readily liquefiable assets to cover outstanding debt, highlighting a degree of vulnerability to an economic downturn.

•    The share of foreign (non-resident) holdings of Australian listed shares rose from 40.3 per cent in the December quarter to a 12-year high of 41.9 per cent in the March quarter (highest since September 1996). Non-residents (rest of the world) acquired a net $20 billion of Australian equities in the March quarter.

•    Financial assets at Australian non-financial companies fell by $0.2 billion to $669.9 billion in the March quarter and liabilities fell for the third straight quarter, down by $10.9billion to $626.9 billion. Net assets stand at $42.9bn – the highest in two years

•    The value of currency & deposits totalled a record $1.54 trillion in the March quarter, out-stripping $939.8bn in shares.

What is the importance of the economic data?
•    The Australian Bureau of Statistics releases the Financial Accounts publication each quarter. The data covers assets, liabilities and financial flows for the key sectors of the economy. Figures on financial wealth help reveal the true state of household finances.

What are the implications for interest rates and investors?
•    The financial accounts data is essentially backward looking and the Reserve Bank would be well aware of the sharp fall in wealth levels over the last year. Importantly signs of stability in the global economy, improved share market conditions and generational low interest rates should help to stabilise activity over the second half of 2009.

•    Australians may have been concerned about a domestic recession, but foreigners haven’t been holding back in buying shares, recognising the good value ‘down under’. Our economy is in good shape, companies are generally well managed and Australia will be a major beneficiary from future industrialisation in China.

posted in Finance by Finance Help

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