The largest part of Australia's economy is looking vulnerable, and in need of help

iStock
  • Australians have been saving less in order to sustain spending levels for the best part of five years.
  • That’s because disposable income has been growing far slower than spending during this period.
  • Australians are saving the lowest proportion of their income in over a decade.
  • Unless Australians save even less, or dig into their savings, spending looks set to remain weak unless income growth improves.
  • Tax relief for workers is one way that could assist firmer growth in disposable incomes.

Australia’s economy slowed sharply in the second half of last year, primarily as a result weak spending from households.

According to Australia’s latest national accounts, household consumption grew by just 0.4% during the December, and by 2.0% over the year.

Given Australia’s population is currently growing by around 1.6% per annum, at least according to latest estimates, it suggests that spending was nearly unchanged over the year for the average Australian.

The slowdown in spending is a problem give it accounts for over half of the entire Australian economy. Given the sluggish growth seen late last year, it’s little wonder why the economy performed relatively poorly.

The key question now is whether that will continue?

The chart below does little to inspire confidence that a turnaround is just around the corner.

Macquarie Macro Strategy

From Macquarie Bank, it shows two things.

The first, in the left-hand pane, it shows year-ended percentage growth in household disposable income, overlaid against year-ended growth in household consumption. The second, on the right, is the proportion of disposable income being saved by households.

For the best part of five years, household spending has outpaced growth in disposable incomes.

Indeed, while consumption grew by 2% in the year to December, disposable income grew by only 0.4%, continuing the trends seen in prior years.

To make up for the shortfall between the two, households have been diverting more money away from savings in order to sustain spending levels, leaving the savings ratio just below decade-lows.

That leaves Australia in a vulnerable position, especially at a time when home prices are falling in many parts of the country, including in the largest capital cities.

Unless households are prepared to save less in the quarters ahead, or even dig into their savings as was the case before the GFC, it means household spending will likely remain sluggish, or slow even further, without a lift in disposable income growth.

With home prices falling, and expected to do so for some time yet depending on who you ask, it’s unlikely that households will be prepared to rundown their savings even further in the near-term.

That means it’s incomes that will probably have to be the catalyst to spur on a turnaround in spending, and the broader economy.

Given wage growth is still weak, and is the largest source of income for most households, a sustained lift in disposable income will undoubtedly be helped by tax relief for workers, especially given wages are expected to remain soft for some time yet..

Given the current vulnerable position Australia finds itself in — and it is vulnerable — let’s hope those who can pull the fiscal levers are paying attention.

Any further slowdown in the economy will likely lead to higher unemployment, even before the risk of a potential global economic shock is taken into consideration.

The economy is already growing well below the point where unemployment is expected to remain stable, let alone decline further.

If unemployment starts to rise it will also do little to help improve Australia’s budget position, nor do little win political points from a potential, and likely fleeting, budget surplus.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.