Why you - the consumer - remain the biggest risk facing the Australian economy

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  • Australian retail sales were unchanged in July, a result below the 0.3% increase expected. Non-food sales — an indicator on discretionary spending — fell by 0.25%.
  • Economists at the Commonwealth Bank say the report reinforces the view that consumers remain “the biggest risk for the Australian economy in 2018/19.”
  • Labour market conditions will play a key role in determining the outlook for spending, particularly at a time when home prices are falling in many parts of the country.

Australian retail sales were unchanged in July, according to the ABS, with an unusually large bounce in Queensland managing to offset flat-to-lower outcomes in all other Australian states and territories.

Non-food sales — a better indication on discretionary spending patterns across the country — were even weaker than the headline figure, falling 0.25% to two decimal places, partially reversing the strength seen in June.

While one month does not make a trend, and sales had grown strongly over the prior three months, the July report was yet another unsettling indicator of the vulnerabilities facing Australia’s household sector.

To Belinda Allen, Senior Economist at the Commonwealth Bank, the result reinforces the view that the you, the consumer, are the biggest risk facing the Australian economy in the year ahead.

“Today‚Äôs data reversed this trend and highlights the challenges that the consumer continues to face,” she said following the report’s release.

“This list includes elevated petrol prices, high debt levels, the switch from interest only to principal and interest loans and low wages growth.

“Add to this new headlines around lower dwelling prices and higher mortgage rates.

“The outlook for the consumer remains the biggest risk for the Australian economy in 2018/19 with these many competing forces at play.”

Given that backdrop, Allen says labour market conditions will need to remain firm to help offset the impact of the headwinds facing the consumer.

“The upside in the outlook for consumer spending remains the labour market,” she says.

“Employment growth remains solid and this is helping hold up the overall level of income growth.

“Total compensation to employees is up 4.5% for the year to June 2018, this takes into account headcount and wages growth and is a better indicator of the extra income that consumers can use to spend, albeit this reading has fallen slightly).”

Allen says the great uncertainty is whether this additional household income will be spent or saved given Australia’s household savings ratio hit the lowest level since before the GFC in the first three months of the year.

“With the savings ratio low, households could be using this extra income to rebuild savings,” she says.

We’ll find out the answer to that question later this week when Australia’s Q2 GDP report is released.

Despite the challenges facing household spending, potentially raising the risk that households may choose to save rather than spend additional income at a time when home prices are falling, Jo Masters, Senior Economist at ANZ Bank, expects that consumer spending can “muddle through this year.”

“Some moderation in retail sales is consistent with lower consumer confidence and falling house prices,” she says.

“However, we would caution reading too much into one data point in a monthly series. In trend terms, retail sales continue to improve.

“There are certainly headwinds for the household sector, including the prospect of out-of-cycle rate hikes. However, income tax cuts, the new Childcare Subsidy, falls in some utility prices and lower petrol prices will all provide material offsets.”

For an economy where household spending accounts for just under 60% of total GDP, here’s hoping Masters is right.

Australia’s Q2 GDP report will be released on Wednesday, September 5.

Prior to the release of Australia’s Q2 business indicators today, economists were forecasting a quarterly increase of 0.7%, leaving growth over the past year at 2.8%, down from the 3.1% pace seen in the year to March.

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