This week’s solid GDP report did nothing to quell growing concern among analysts about the forces threatening the biggest component of economic growth — domestic consumption.
Yes, Australia extended its run without a recession to 26 straight years, but specific components of the report raised eyebrows.
Add Capital Economics chief economist Paul Dales to the list of analysts worried about the outlook for consumption growth.
Dales described his response to Wednesday’s Q2 GDP report as follows:
At the exact time that Treasurer Scott Morrison was tub-thumping the 0.8% q/q rise in GDP in Australia in the second quarter announced earlier this week, we were picking ourselves up after having been knocked down by the weakness of the news on the household sector.
The Capital Economics team weren’t impressed, to say the least.
Dales noted that the 0.7% rise in Q2 domestic consumption was, in fact, higher than Q1. But in terms of the future outlook, he was more concerned about the lacklustre growth in disposable income.
And this chart shows why – the Q2 results made it five straight quarters that growth in disposable income hasn’t kept up with consumption:
It means that over the past year, growth in real household disposable income –which is the level of growth adjusted for inflation — has risen by just 0.6%.
“In other words, the amount of money households are taking home after paying their taxes and higher prices has hardly risen at all over the past year,” Dales said.
And Dales doesn’t expect the situation to improve in the near-term, given that any growth in incomes will be off-set by the rise in energy prices effective from July 1.
Along with the falls in disposable income, Dales also joined other analysts in highlighting Australia’s household savings rate.
Not surprisingly, it’s declining. The 4.6% rate was a nine-year low, and household savings have more than halved from 9.5% at the start of 2013.
Dales noted that a low household savings rate isn’t necessarily bad. In fact, from 1998-2008 it was lower than it is now:
That period of increased spending coincided with a change in consumption patterns stemming from the mining boom.
However, the dynamics of the economy are different now, with wage growth much lower while household debt and living costs remain high.
For context, Dales compared Australia’s dwindling household savings to the US and the UK. He noted that they too are seeing a fall in household savings, but with a key difference — households in the US and the UK are less leveraged, while Australia’s debt-to-income ratio keeps climbing:
“The high level of debt in Australia means there is less scope for households to continue to use credit to compensate for low income growth,” Dales said.
And until income growth picks up, there’s only so much further the savings rate can decline.
In fact, Dales said savings may even increase as house price growth cools, given that households won’t be able to rely on the wealth effect of increasing house prices to provide a favourable backdrop for spending.
“The link between the saving rate and house price inflation is far from perfect, but slowing house price inflation is usually accompanied by a rising saving rate,” he said.
Add it all up, and it doesn’t bode well for a pickup in future consumption growth — the biggest contributor to quarterly GDP.
Seemingly, the key factor for sustained consumption growth will be a rise in wages, but Dales expects that real income growth will remain weak “for at least another 18 months or so”.
“Overall, while some policymakers have become more hopeful, we fear the next big development will be a marked slowdown in consumption growth,” he said.
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