Households in Melbourne and Sydney are saving rather than spending, a report has suggested.

According to the Savings Blog, which also studies people that are moving to England, families in big cities are choosing to put money away in a savings account rather than spending, with concerns over the strength of the economy and employment weighing heavily on consumer confidence.

According to AAP, a new report from Merrill Lynch claimed Melbourne and Sydney have borne the brunt of recent weakness, as their regional economies have been hampered by household debt, the high cost of living and dependence on manufacturing and finance jobs more than other areas of the country.

Joshua Kirkwood, the study's author, warned conditions in the two cities could prove challenging for several years to come. He also expressed concern about the performance of the retail sector, pointing to structural problems and additional uncertainty about global finances.

"We have previously argued that Australian households decided before the financial crisis to improve their balance sheets by paying down debt," he explained. "We believe that consumers - knowing wealth will no longer be built from seemingly endless rises in house prices - with the ability to save more have scaled back discretionary consumption in favour of saving."

Mr Kirkwood observed that living expenses are lower in Perth - close to the epicentre of the resources boom - than in Sydney and Melbourne and predicted financial sector profits will struggle to return to pre-recession levels, possibly triggering widespread job losses.

His remarks came after Paul Zahra, chief executive of upmarket department store chain David Jones, announced a surprise decline in earnings and sales. However, he was more upbeat about the industry's prospects, tipping consumer spending to embark on a gradual recovery.

Earlier in the week, the Herald Sun reported that ING Direct's latest Financial Wellbeing Index revealed households in Victoria were placing more cash into saving accounts than their counterparts in any other Australian state, stashing away an average of $373 per month.

Meanwhile, Westpac has advised savings account holders that the Reserve Bank of Australia (RBA) may find itself with no alternative but to cut interest rates before the end of this year.

In a report issued last weekend, Westpac economist Bill Evans predicted the bank rate would be lowered by around one per cent during the next 12 months, citing lingering uncertainty over global fiscal stability.

"The catalyst for the first rate cut is likely to be associated with these European convulsions, but further cuts will be driven by the combined negative impact of European events on confidence and specific domestic issues," he stated.

Mr Evans added that current interest rates are too high due to ongoing weakness in the domestic economy outside of the resources sector and tipped the RBA to implement a 0.25 per cent reduction in December.

Last week, assistant Treasurer Bill Shorten announced plans to cut tax on interest income for individuals with savings accounts, claiming more than five million people will benefit from the reform.

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