Crisis triggers all sorts of reactions, however, there are certain reactions you can expect to generally see when a crisis hits masses in general. When it comes to economies, one of the commonly witnessed reactions is that of increased level of savings and less spending.
However, if not controlled well, the move can be a vicious downward spiral. Stagnation in spending causes serious implications for the wider economy. Here’s how;
First, people tend to save more. Savings help people withstand shocks when economic activities are disrupted. With more savings comes less spending. That means businesses have fewer customers which results in less revenue. Jobs are then reduced over time as some businesses go bankrupt, increasing the rate of unemployment. The economy will then have more people competing for fewer jobs at lower wages. There will be increased fear and uncertainty about the future. The impact on consumption goes beyond just shifting from spending to saving.
Looking at Australia’s household savings rate across years, there is notable increase in savings ratio during global crisis. In the years 2008 – 2009, after the global financial crisis, the savings ratio rose to 11%. A similar trend is observable in 2020 following the COVID-19 crisis. Australian households are increasingly putting money away for a rainy day.
There are several levers available to the Australian government to break the vicious spiral loop. The first is lowering the interest rates. When interest rates are lowered, borrowing becomes cheaper encouraging people to spend more. Another approach is implementation of tax cuts. With less tax, people have more to spend thereby increasing consumption. The government can also increase its infrastructure spending. This will in turn generate business activity, create more jobs and reduce unemployment levels.