- CBA chief economist Michael Blythe said Australian consumers have been pessimistic since 2013.
- Blythe considered what ramifications the extended period of poor sentiment has for the broader economy.
- Within that context, he highlighted the key areas policy-makers need to focus on to extend Australia’s run of economic growth .
Low wage growth, high household debt and rising energy costs. Those are three of the main themes discussed in recent months when it comes to the plight of the Australian consumer.
But according to Commonwealth Bank chief economist Michael Blythe, negative consumer sentiment is nothing new.
And he had some interesting insights into what the extended rough patch means for the outlook for consumption — the primary component of domestic GDP.
“Australian households have generally been a pessimistic lot since 2013,” Blythe said.
Blythe highlighted Westpac’s monthly consumer confidence index as evidence of an extended downturn.
While confidence has edged higher lately, the reading has generally hovered around the mark where pessimists outnumber optimists in recent years:
He said CBA’s own measures on consumer sentiment have produced similarly negative results.
Since 2011, between 40-50% of respondents said their personal circumstances were worse than six months ago, compared to just a quarter who indicated some improvement.
The key questions is what this extended shift really means for consumer behavior in Australia.
“The risk is that the consumer is now less responsive to good economic news,” Blythe said. “And potentially more reactive on the downside. Consumers could scale back spending by more than normal in response to a ‘shock’, accentuating any downturn.”
And there has been some good news lately. For one thing, Blythe noted the strength in Australia’s labour market. And despite the recent downturn in house prices, Blythe said a housing crisis is still unlikely.
“Household debt servicing costs are low. It takes 5.7% of disposable income to service the stock of housing and consumer debt, the lowest share since 2003,” Blythe said.
However, “in the end, perception is reality. And the array of forces identified in our household surveys provides a fairly toxic backdrop for consumer spending”.
Blythe highlighted the household wealth effect as one area where a shift in behaviour has been evident.
The value of Australia’s housing stock has increased by $2 trillion over the last four and a half years. That’s provided solid wealth gains — particularly for owners in Sydney and Melbourne who got into the market before then.
“But households are not responding,” Blythe said.
Instead, homeowners are channeling extra disposable income into paying down debt, while “consumer lending indicators reveal little appetite to tap into the accumulated wealth.”
Blythe presented CBA data which shows household spending has continued to run ahead of income growth in recent years, which means households are reducing their savings rate.
However, that’s unlikely to run much further, which means the outlook for consumer spending will rely on higher wages. And Australia’s chronically low wage growth continues to be well-documented.
Blythe said the next move in interest rates is more likely to be up than down. And while the federal government has flagged income tax cuts in the May budget, any positive flow-on effect won’t be realised for some time.
Rather, Blythe said said policy-makers should put a coordinated focus on finding ways to boost wage growth.
While a return to a fully-centralised wage system is not desirable, higher wages would boost economic growth by assisting the lower-income families that need it most.
“A more attractive approach might be offered by Japan’s proposal to cut company taxes — but only for those companies lifting wages and capex,” Blythe said.
Any change to wages policy would also have to be combined with the delicate line being walked by the RBA on interest rates, where households re-servicing debt are increasingly sensitive to any rate hikes.
“These observations underline the critical importance of getting the economic and policy backdrop right,” Blythe said.
“The correct environment will see jobs growth continue, labour market slack diminish and wages eventually respond.”
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