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Photographer: Dallas Kilponen/Bloomberg Photographer: Dallas Kilponen/Bloomberg

Australians may soon be struggling to make ends meet.

With real wages going backward in the first quarter and the developed world’s highest debt-to-GDP ratio after Switzerland, consumers are setting aside less cash for a rainy day: their savings levels have more than halved in five years. Further intensifying the squeeze is a rising cost of living, with electricity prices climbing as much as 20 percent in New South Wales state next month.

At stake is the economy’s trajectory: consumption accounts for more than half of gross domestic product, and any long-term weakness in spending will weigh on growth. As to ballooning debt, while the central bank can’t say how high is sustainable, it warns that the deeply indebted can be more sensitive to declines in income “and may respond by reducing consumption sharply.”

“We’re starting to see signs the consumer is looking to see where they can take cheaper options,” said Daniel Blake, an interest-rate strategist at Morgan Stanley in Sydney, who also notes a rare drop in private-health insurance participation as households scale back. “There’s likely to be another meaningful slowdown in consumption.”

Australia’s household debt to GDP ratio has climbed almost 15 percentage points in four years, to 123.1 percent in 2016, data from Bank for International Settlements show. Known as the central bankers’ bank, its annual report released Sunday said household debt outpacing GDP growth over prolonged periods is a “robust early warning” signal of financial stress.

According to BIS, while rising household debt boosts short-term consumption, an increase of just 1 percentage point in the debt-to-GDP ratio “is associated with growth that is 0.1 percentage point lower in the long run.”

At the heart of Australia’s problem: record-low interest rates. These have allowed home buyers to borrow vast sums in order to break into the Sydney and Melbourne property markets, where prices have about doubled since 2009.

No Buffer

Policy makers are now worrying about some borrowers’ resilience.

The Reserve Bank of Australia noted in April that about a third of mortgage holders had either no buffer or not enough of one to cover a month’s worth of repayments. The most vulnerable tended to hold newer loans or come from “lower-income and lower-wealth households.” Moreover, it said almost a quarter of borrowers were on “interest only” mortgages.

That’s prompted the bank regulator, supported by the RBA, to enforce measures to rein in riskier mortgages and strengthen lending standards. Australians have historically been able to load up on debt and then inflate it away through wage gains and rising consumer prices. But this time it’s different: their huge debt just remains huge.

Stagnant wages, meanwhile, are a problem confronted by a number of developed economies including Germany, the U.K., Japan and the U.S., which are already at or near full employment, further compounding the dilemma.

Down Under, it’s assumed that workers who have lost highly-paid jobs in mining and associated industries have moved to less well-paid positions. Jobs in health care, accommodation and food, professional services and transport accounted for most of the strong employment gains in the three months through May -- industries that generally pay below-average wages.

Meanwhile, the economy shed better paying jobs: the industries with the highest average weekly earnings are mining, utilities and finance, according to Citigroup Inc. Those sectors all cut positions in the three months through May.

Unfair Share

But there’s also a distribution issue: the share of GDP going into workers’ pockets has slumped to a record low. Australia Institute research shows total compensation that includes wages, salaries, and pension contributions fell to 46.2 percent of GDP in the first quarter, below the previous record low of 46.4 percent in 1959.

These factors last week prompted RBA Governor Philip Lowe to take an unprecedented step -- for a central bank chief -- urging Aussie workers to ask for bigger pay increases.

Still, consumption in Australia is running close to its decade average -- unlike wage growth -- and motor vehicle sales reached an all-time monthly high in May. But it’s a mismatch that looks unsustainable in the longer term.

Part of the RBA’s thinking behind slashing rates was to stimulate residential construction, providing a soft landing for workers leaving mining jobs amid the end of an investment boom. But the jobs outlook in construction is weakening as home building peaks, says Morgan Stanley’s Blake.

The last thing the RBA wants is to take the cash rate below the current 1.5 percent and stoke a new round of borrowing and house-price growth. It would prefer the government to undertake wide-ranging infrastructure stimulus -- with the added benefit of another soft landing for workers leaving the residential building sector.

“If it starts to become clear that a crunch on incomes and a tighter credit environment is leading to a collapse of confidence in job security and consumers are really retrenching on their spending, then that’s when the RBA would have to consider cutting rates,” Blake said. “But if this is just a grind out, and the economy just disappoints against their forecasts, then they’re likely to choose to wait it out.”

— With assistance by Garfield Clinton Reynolds