The key risk facing Australia's economy, according to Commonwealth Bank

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  • In an investor presentation this morning, CBA reiterated that low wage growth and high household debt present a key risk to the consumption outlook.
  • The bank highlighted that consumers now have a renewed focus on paying down debt, and the household savings rate is at a decade low.
  • Such a scenario is “a positive for financial stability but a negative for consumer activity,”, CBA said.

Australia’s biggest bank says the combination of high household debt and low wage growth is the biggest risk facing the domestic economy.

The observation was made in Commonwealth Bank’s investor presentation this morning, accompanying the full year earnings result which showed cash profits fell by 4.8%.

The dual-threat highlighted by CBA is a familiar theme for those who’ve followed financial markets over the last 12 months.

Wage growth remains anemic, and combined with high debt levels it raises doubts over the outlook for domestic consumption, which comprises around 60% of GDP.

CBA also noted that household savings levels are now falling. The bank’s view was summarised in the slide below:

Commonwealth Bank

As the chart on the right shows, Australia’s household savings rate is now at a decade-low of 2.1%.

In addition to low wage growth and high debt levels, UBS analysts said last month that household budgets may be under further pressure as more people shift into principal and interest repayment plans on their home loans.

So far, “households have been happy to reduce savings rate to fund spending,” CBA said.

“But the focus is shifting to saving and paying off debt – a positive for financial stability but a negative for consumer activity.”

The renewed focus on reducing debt may also be a symptom of the fact that Australia’s housing market is now in decline.

As evidence of how falling house prices can weigh on consumption, CBA’s business sales indicator in June showed that spending fell in NSW and Victoria — the two markets where house prices are falling the fastest.

House prices in Sydney have now fallen by 5.5% in annual terms, while the Melbourne market is down by 2.8%.

That being said, Westpac’s consumer confidence index rose to a four-year high in July, propelled by stronger confidence levels towards the economic outlook.

And monthly retail sales data has beaten expectations for three straight months, which economists say bodes well for the consumption component of Q2 GDP.

Looking on the brighter side of the economic outlook more broadly, CBA said population growth will continue to support construction activity while “the long-awaited pick up in non-mining capital investment is finally underway”.

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