Low interest rates are meant to stimulate an economy, but recent research suggests Aussies have instead used cheap money to pay back mortgages. A new report from the Reserve Bank estimates that somewhere between 50% to 90% of all cash saved from interest rate cuts has headed straight for mortgage prepayments.
Paying back a mortgage ahead of time might bring peace of mind to homeowners, but it's a hindrance to any hope for a fast economic recovery. With an increasingly expensive Aussie dollar, the nation's starving retail sector has been hit especially hard by the spending squeeze.
Premier Investments (ASX: PMV) Chairman and former Reserve Bank board member Solomon Lew wagged his finger at the Gillard-Rudd government earlier this week for wrecking retail while the mining sector soared. But while Lew lamented an online shopping GST loophole as a main reason for retail's downfall, Aussies may simply have opted for home ownership over hats or hosiery.
Banks may be feeling a funding squeeze, too. Instead of taking out more money from financial institutions, Aussies have been busy paying off outstanding debts. According to the report, total housing credit would've grown by a whopping $10 billion if Aussies hadn't paid off their debts so fast.
Foolish takeaway
In the ultimate global financial recovery Catch-22, consumers' caution is now a liability. From retailers like Myer (ASX: MYR) and David Jones (ASX: DJS) to big banks like ANZ (ASX: ANZ) and Westpac (ASX: WBC), Aussies simply aren't spending like they used to.
While this news doesn't point to tough times for any specific company, investors should expect less-than-rapid recoveries for retail and financial sectors. At the same time, smart spending could signal a shift towards a stronger and more sustainable economy, a certain cause for celebration for any long-term investor. Companies that can adapt to consumer demand are the ones that win out in the end, even if it takes longer than we'd like.
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Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.
