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Money

Do declining household deposits point to recession?

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The Australian economy is facing a potential full-blown recession as indicated by the decline in household deposits held by Australian banks, which raises concerns about the financial stability of households. However, there is optimism for a potential recovery in late 2024 or 2025.

The recent interest rate hikes and soaring inflation rates have instilled caution in consumers, causing them to adopt a more frugal approach to their spending habits.

This has resulted in a noticeable deceleration in household spending and a decrease in deposits. This is having a direct impact on businesses, with those seeking assistance from administrators and insolvency firms, rising by an alarming 50% in the past three months alone.

These developments pose significant concerns for the Reserve Bank of Australia (RBA) as they grapple with the intricate task of addressing these challenges. It is imperative that they carefully assess the repercussions of these circumstances on the overall stability of the Australian economy.

According to the Australian Prudential Regulation Authority (APRA), household deposits across the banking system experienced a significant decline of $7.76 billion in June, representing a drop of 0.56%. This decline marks the sixth consecutive quarterly decrease in the household savings ratio (calculated by dividing household savings by household disposable income), reaching its lowest level in nearly 15 years.

Households now have a savings ratio of less than 3.7%, which is significantly lower than the usual running average of 5%.

To better understand the significance of this decrease, it is important to note that in December 2021, the housing savings ratio stood at a significant 13.5%.

This was primarily due to the substantial savings accumulated by households during the pandemic lockdowns.

The diminishing value of household deposits is a clear indication that more households are feeling the financial strain caused by the monetary policies implemented by the RBA.

As household spending continues to outpace income growth, Australian households are increasingly forced to dip into their savings, as evidenced by the significant increase of 11.5% in interest paid on mortgages during the last quarter.

The decline in the household savings ratio and the necessity to tap into savings to cover expenses highlights the challenges faced by many households in the current economic climate.

This raises concerns about the sustainability of household finances and the potential impact on overall economic stability.

It is essential for the RBA to consider the delayed effects of interest rate hikes on mortgage holders and adopt appropriate measures to alleviate the financial burden on households and businesses.

Consumer sentiment remains negative, which can be attributed to the risks posed to personal finances.

Retail spending has experienced a decline for three consecutive quarters, indicating the cautious approach adopted by consumers.

While Australia lags slightly behind the United States in the global inflation picture, similar dynamics are observed, with sticky services inflation and a robust labour market.

However, Australia’s unique factors, such as minimum wage increases, rent, and utilities frameworks, present additional challenges to the economy.

Even if inflation is brought within the 2-3% target range, prices will remain higher than they were 12 months ago and can be expected to continue rising. This trend is expected to have an ongoing impact on the savings ratio.

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Central bank expected to ease interest rates as election nears

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The Federal Reserve is expected to cut interest rates again this week, a move aimed at cooling inflation.

This quarter-point rate cut would bring the benchmark rate to about 4.6%, the second reduction this year.

Analysts expect that additional cuts could come in December, which would benefit borrowers by reducing loan costs.

If Trump were to win the election, economists say his proposals on trade and immigration could reignite inflation.

The Fed is balancing a strong economy and low unemployment with its inflation-calibrated rate cuts.

As Election Day approaches, all eyes are on both the Fed and the presidential race.

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Money

Big Tech pushes AI investments

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Tech giants like Microsoft and Meta are accelerating AI data center spending, with massive capital pouring into these projects.

Microsoft and Meta reported on Wednesday that AI investments are spiking their expenses, while Alphabet announced similar trends.

Amazon, due to report earnings shortly, is expected to mirror these projections, foreseeing further pressure on profit margins.

Wall Street is getting wary of the financial strain, as each company’s stock took a hit this week despite strong quarterly numbers.

Shares of Meta fell over 3%, and Microsoft saw a 6% drop, underscoring Wall Street’s jitters.

“It’s expensive to keep up with AI technology demands,” says GlobalData’s Beatriz Valle, emphasising a competitive race in AI capacity.

The high-stakes investments are starting to test investor patience in Big Tech’s ambitious AI journey.

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Meta expects strong holiday ad revenue boost

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Meta’s holiday-quarter forecast beats expectations as AI tools drive growth

Meta Platforms, parent company of Facebook, has forecast holiday-quarter revenue that surpasses market expectations, anticipating a surge in ad spending as the year ends.

The projection comes as Meta’s AI-driven advertising tools and short-form video feature Reels have spurred revenue growth this year.

Meta’s shares dipped 2.5% in after-hours trading, despite a third-quarter profit of $6.03 per share—well above analysts’ forecast of $5.25.

Analysts expect digital ads to have a “blockbuster” year in 2024, helped by improved economic forecasts and steady consumer spending.

Meta, heavily reliant on advertising revenue, stands to benefit from increased holiday marketing as it eyes revenues of $45 to $48 billion this quarter.

The company’s third-quarter revenue reached $40.59 billion, narrowly topping analysts’ estimates.

With interest rates easing, analysts suggest Meta’s ad revenue could continue to thrive into the new year.

As holiday spending ramps up, Meta’s AI investments are paying off.

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