Australians tighten purse strings in another hurdle for the economy

(Photo by Spencer Platt/Getty Images)

Australians aren’t going out shopping as they used in worrying signs for the economy as record household debt comes to the fore.

Retail sales fell 0.1% in March marking the third time in four months the measure has declined and missed forecast for a 0.3% rise, government statistics showed Tuesday.

Last month’s data was also revised lower to show a 0.2% fall compared to a 0.1% fall previously. The annual rate of growth fell to 2.1%, which is the slowest rate since mid 2013.

The data only underscores the central bank’s worries that surging debt has weakened the resilience of the economy to combat future shocks. Households could slash their spending in response to any shock, meaning “an otherwise manageable downturn could be turned into something more serious,” Reserve Bank of Australia governor Philip Lowe said last week.

“We received further confirmation that the Australian household is officially battling,” asset management firm Cameron Harrison said in a note titled SOS from Australian households.

“The structural reality for households “is unquestionably poor and weakening. These are monthly data points which run counter to interest rates moving upwards and portend greater pressure on bank mortgage books and bad and doubtful debt provisioning.”

This chart by JPMorgan illustrates the retail slowdown

The soft retail number has forced the likes of RBC Capital Markets and AMP Capital to comment on the drag on economic growth. RBC Capital Markets cut its first quarter economic growth estimates to 0.3% from 0.4% and AMP Capital’s chief economist Shane Oliver tweeted the chances of a RBA rate hike has vanished with the data adding to chances of a rate cut.

Most economists are still predicting the RBA will stay on hold for the rest of the year. However the major banks, which have an 80% market share in mortgages to business loans, have started putting up interest rates as regulators impose lending curbs, partly to protect their eroding net interest margins.

Last month Morgan Stanley analysts said the banking regulator’s intervention to apply the brakes on speculative housing activity by limiting the flow of interest-only lending could directly strip billions of dollars out of household consumption.

It blamed bank moves to reprice mortgages and the clampdown for forcing investors to wade into principal and interest repayments, rather than just servicing the interest-only component.

That is starting to show.

With retail spending typically contributing 55%-60% of total household consumption, the scene is set for a weak household spending number in Q1’s national accounts.

Australia is set to release first quarter GDP numbers June 7.

“While today’s result is disappointing it does make sense given weak wages growth, elevated underemployment and high household debt levels,” Kristina Clifton, an economist at Commonwealth bank of Australia said.

This chart by RBA shows household finances and consumption

Wage growth has continued to drop to new lows and the unemployment rate remained at a one-year high of 5.9% in March and the RBA says economic growth would’t bring with it enough jobs.

“My overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks,” the RBA governor said in his speech last week. “Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy.”

Australia’s household debt stands at about 123% of GDP up from 70% in 1977. The household savings ratio fell to 5.2% in the final quarter of 2016, the lowest since 2008.

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