Consumers cut back borrowing

Consumers are becoming more frugal, refusing to spend their own or borrowed money, after RBA data showed Australian households spent $2.2 billion less in June that in May.

Australians spent $20.3 billion on purchases in June, compared to $22.6 billion the previous month, despite credit limits hitting an all-time high of $139.8 billion. Credit card balances have been relatively stable since December 2010, at around $49 billion.

Repayments on credit cards hit $21.2 billion in June, continuing the theme of consumers paying down debt. In eight of the last twelve months, repayments have been higher than new charges.

Separate data from the Australian Bureau of Statistics (ABS) show personal loans dropped 2.7% in June to $7.8 billion, from $8 billion in May. That suggests that consumers have tightened the purse strings, and are being selective about what they spend their money on. It also contradicts Reserve bank governor Glenn Stevens’ view that there are signs of increased demand for finance by households. Unless he means home buyers that is – housing finance commitments for owner-occupied housing rose 2.1% in June.

On the other hand, business and commercial lending surged sharply in June, up 11.5% in seasonally adjusted terms. With businesses lending generally for longer-term periods, it makes sense for business to refinance loans and borrow when interest rates are at all-time lows.

While we have seen consumers being cautious, it hasn’t stopped several companies report growing earnings. JB Hi-Fi Limited (ASX:JBH) reported improving like-for-like sales, suggesting the retail environment may be improving. That bodes well for competitor Harvey Norman Holdings (ASX:HVN) when it releases its results later this month.

It could also be good news for furniture retailer Fantastic Holdings (ASX:FAN) and discount variety retailer The Reject Shop (ASX:TRS). Fantastic had a disappointing first six months, but may have been able to turn it around in the second half.

Foolish takeaway

Consumers may have their eyes on next months’ election – hoping that it will provide certainty for the next couple of years – which could prompt a surge in household borrowing and spending.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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