Australians' debt worries may blunt economic stimulus

By Michael Perry - Analysis

SYDNEY (Reuters) - A decade-long credit binge by Australians has left them struggling with a mountain of debt which may blunt central bank and government moves to stimulate the economy and avoid recession.

While the Reserve Bank of Australia has slashed official cash rates to encourage Australians to spend in the face of a global downturn, high and rising credit card rates are seeing them close their purses and wallets.

Worries about household debt also looks set to limit the national government's A$10.4 billion stimulus package when it starts flowing next month, with surveys showing Australians will not spend their share but pay off mortgages or other debt.

"The fact that households are so indebted, particularly with credit cards, and household debt as a proportion of income is so high, there is a chance it is impeding monetary policy," Josh Williamson, senior analyst at TD Securities said on Thursday.

Over the past decade Australians have gone on a credit binge, their confidence underpinned by 16 years of consecutive economic growth, high employment, soaring house prices and low interest rates.

Australians have leveraged themselves like never before, buying shares and investment properties and taking out home-equity loans to pay for holidays, boats and cars.

In the past 10 years, total housing debt (owner and investor) has soared to A$981 billion from A$236 billion in 1998.

Credit card debt has quadrupled to A$44.6 billion from A$11.6 billion, on the back of a 64 percent rise in the number of credit card accounts to 14.2 million.

However, economic optimism is now evaporating quickly as the global financial crisis starts to hit Australia's shores.

Australians are becoming pessimistic and worried about job security, say several surveys, despite the fact the local economy continues to grow and few have lost jobs or homes due to the credit crisis.

WARNING

The Reserve Bank of Australia governor Glenn Stevens has warned Australians not to talk themselves into a recession.

"Given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness," Stevens said on Wednesday.

Still, economic growth is slowing rapidly. Some economists have penciled in growth of just 1 percent next year, a sharp slowdown from 4 percent in 2007.

Neighboring New Zealand, Japan and the euro zone are already in recession and the United States is considered by economists to also be in recession.