Australian household finances aren’t all that healthy right now if recent household spending figures are to be believed.
Retail sales have fallen in three of the past four months and the Commonwealth Bank’s Business Spending Indicator (BSI) — a measure on spending on goods and services processed through the bank’s merchant facilities — stalled in April, coming in flat after a downwardly-revised 0.1% gain in March.
Spending is weaker than usual, but why?
According to the UBS Australian economics team, led by Scott Haslem, a combination of record-low wages growth, higher petrol and utilities prices and out-of-cycle mortgage rate increases has meant that household cashflow has slumped in early 2017.
“We’ve updated our household cashflow model, which looks at consumers’ ‘free cash’ after taxes and debt interest payments, and after their utilities and petrol costs. The results are revealing,” they wrote in a research note last week.
“In short, cashflow has slumped into early 2017.
“While low interest rates and falling petrol costs have softened the blow from slowing wage growth in recent years, with still low wages growth, and renewed rises across utilities, debt interest and petrol costs, household cashflow is now under significant renewed downward pressure.”
Essentially, the combination of weak wage growth and higher costs are squeezing household finances, putting downward pressure on spending.
This decline in free cashflow, and its impact on retail sales, is seen in the chart below from UBS. It overlays the annual change in household cashflow against annual retail sales growth.
Both have decelerated sharply in recent months, a trend that UBS suggests creates downside risks to consumption and the RBA’s growth forecasts, especially given signs that households may not be willing to curb saving levels further — something that supported consumption levels late last year — in the months ahead.
“While households have broadly maintained their real consumption growth into late 2016, this has been significantly achieved by drawing on their saving,” it says.
“But with cashflow growth continuing to slow, and savings intentions rising, it’s likely this drawdown in saving rate will end.
“Our call for flattening house prices and a fading wealth effect into 2018 add to this case.”
Given that outlook, UBS is forecasting that consumption growth will likely slow this year and next, creating doubts over an expected rebound in Australian GDP growth given it makes up close to 60% of the total national economy.
“We maintain our forecasts for slower consumer spending growth in 2017 and 2018 — from 2.75% year-on-year in 2015-16 to 2.25% by 2018 — as an improving jobs market is partly offset by a fading wealth effect as housing corrects,” it says.
“The recent cashflow weakness adds some downside risk to our forecasts and questions the RBA’s more upbeat forecasts for sustained above 3% GDP growth through to 2019.”