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Aussies are using loans to pay off loans

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.

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