PCI knows bankruptcy – september 2019
Sep 10 2019
Bankruptcy And The Economy
On 2 September it was reported that the Australian economy was on the cusp of slumping to its lowest rate of growth in almost two decades. Scott Morrison argued that Australia’s economy was still the envy of the world and that tax cuts were yet to make their impact.
Once upon a time it was much easier to tell how the economy was going, and in which direction it was heading. The numbers were extreme. Interest rates and sometimes unemployment rates were in the double digits, and when they moved, it could well be a full 1%. Now we wait years for a movement of a quarter of a percent, and after that we aren’t even sure whether the next move will be up or down.
It has been almost 30 years since the recession we had to have, and despite almost 3 decades of continued growth we find ourselves looking back and wondering, were those the good years? Was that as good as it gets?
Bankruptcy numbers have never been a great way of forecasting where the economy is heading but have always been an excellent barometer of where we have been. So, what are the current bankruptcy numbers telling us about what the economy has been doing in recent years.
AFSA recently told us that the March numbers were the lowest since the March quarter in 1995. So, what were the economic conditions prevalent in 1995 that might give us some insight as to where we currently stand in terms of overall economic health.
Unemployment had rapidly fallen from 11.2% to 8.2 % in the 3 years to July 1995 and GDP growth was running at 3.8%. The economy continued to perform well until the early 2000’s when we had that awkward little tech crash. But is this a fair comparison, and what other factors would we expect to have influenced bankruptcy numbers over that period?
Specifically, I want to look at 3 things that I think should have had an impact on bankruptcy statistics.
1) the availability of credit,
2) population growth, and
3) any changes to the legal framework concerning bankruptcy.
Household Credit
We keep hearing that Australians have a love affair with credit and that statement seems to be true on many levels. Between 1995 and 2015 the level of household debt doubled from 104% to 212% and on those numbers, we are regularly ranked in the top 5 in international comparisons.
But our houses are expensive and given that 56% of that debt relates to our mortgages, and a further 37% relates to investment (mostly property) maybe that’s not such a big issue.
How about credit card debt? That seems to be the issue that forces a lot of people into bankruptcy, and yes, that’s been on the rise as well. Significantly so based on the graph below.
So, the takeaway from that is, based on the easy access to credit and the significant rise in consumer credit card debt over time, if all other things were equal then we might expect to see that translate to higher numbers of bankruptcies. Let’s hold on to that thought.
Population Growth
The other obvious factor that could influence bankruptcy numbers is population growth. Debates continue about migration, lack of infrastructure, and the concept of a BIG Australia, but the numbers are easy to see. Since 1995 the Australian population has grown from 18.2M to 25.2M in 2019, an increase of 39%
So, with a 39 % growth in population since 1995, and again, all other things being equal, what would we expect to see happen in relation to bankruptcy numbers? That’s right, a 39 % increase in bankruptcy numbers. But we haven’t. Maybe there is something else going on?
Legal Framework
In 1996 the Bankruptcy Act was amended to provide for a new type of process by which people could deal with their debt issues. It was called a Part IX, or debt agreement, and it allowed people who fell within certain criteria to compromise their debts by entering into a formal agreement with their creditors. It was a much less rigorous process than the existing Part X and it became a popular process to deal with unmanageable credit card debts. So much so that there are now publicly listed companies actively promoting debt agreements which were embraced by over 11,000 people in the 2018 calendar year.
These numbers are now included in AFSA’s official statistics for insolvency administrations and account for 43 % of total personal insolvencies.
Lies, Damn Lies And Statistics
To get a better understanding of whether bankruptcies are rising or falling it makes sense to look at bankruptcy statistics as a percentage of the total population rather than just the actual number.
Let’s consider how many insolvencies (or bankruptcies) are occurring per 100,000 head of population so that we can better understand the impact that economic conditions are having on the ability of the population to deal with their creditors?
So, despite a tenfold increase in credit card debt and the introduction of a new insolvency framework to assist insolvent debtors to deal with their problems, numbers are still down. Yes, bankruptcies (as a % of total population) have been falling steadily since a peak of 140 in 1999 to less than 62 in 2019. Even including Debt Agreements, total personal insolvencies (as a % of total population) have also fallen heavily from a peak of 168 in 2009 to 109 in 2019.
What does that mean for the economy? Well, I can only conclude that times have been pretty good. Not unexpectedly we saw a peak of total insolvencies just after the global financial crises and since then numbers have been steadily falling.
That’s no help in determining where we are heading, but it does add weight to the argument that recent economic times have been pretty good despite what we are sometimes told. And that leads me to my biggest issue, interest rates. Have times really been that tough that the RBA needed to keep cutting interest rates to historically low levels. That’s certainly not what the bankruptcy numbers are telling us.
They say the best way to avoid a hangover is to keep drinking. It seems that the RBA will have us drinking in these low interest rates for some time to come because the forecast hangover is too ugly to think about.