They say a picture paints a thousand words, and when it comes to the three charts below from ANZ, they present an unsettling snapshot on the health of Australian household budgets at present.
The first looks at annual growth in household consumption, shown in yellow, against that of household incomes, shown in blue.
Quite a gap has opened up between the two recently, continuing the pattern of consumption outstripping incomes growth over the past three years.
And, as the next chart shows, in order to maintain spending levels, households have had to allocate more money away from saving to do so.
The nation’s household savings ratio, measuring the amount saved as a percentage of disposable income, fell to 4.6% in the June quarter, leaving it at the lowest level since before the global financial crisis.
It’s also well below the cyclical peak of 10.9% struck in mid-2008.
While it’s been lower in the past, and could be a sign that households are becoming more confident to spend rather than save as labour market conditions start to improve, recent consumer confidence figures suggest that’s unlikely to be the main driver behind the recent decline.
This, more than likely, is:
It’s the wages measures from the GDP report on an annualised basis, and they present an ugly picture.
“The GDP measure of wages may have finally found a base, although it remains very weak,” says ANZ. “It fell 0.3% in Q2, following a rise of 0.7% in Q1, and is just below year-ago levels.”
Unit labour costs — measuring labour costs per unit of output produced — also fell by 0.1% during the quarter.
Combined, the three charts are undoubtedly a worry.
Faced with tepid wage growth and high levels of indebtedness, households are choosing to save less in order to maintain their spending levels.
While there still is a small buffer, ANZ rightfully asks the question: “With house price growth easing and consumers still weighed down by a pile of debt, how much longer can this go on?”
Not indefinitely is the answer.
In the absence of a pick-up in wage pressures, households will either have to choose to borrow or spend less. It’s unlikely to be the former.
Wage growth needs to improve, otherwise we’re potentially looking at a slowdown in the largest and most important part of the Australian economy.
ANZ isn’t optimistic about the outlook, suggesting that it’s difficult to see consumer spending accelerating given the “toxic combination of high debt and low income growth”.
Indeed, only today we received news that Australian retail sales fell flat in July with strength in food sales offsetting large declines in spending on household goods and in department stores.
Jo Masters, senior economist at ANZ, summed up the current conundrum perfectly in a note released following the report.
“Softening retail sales is consistent with our view that households will struggle to sustain consumption growth above income growth — particularly given weak wage growth and high levels of household debt — and we continue to see the consumer as a key risk to the economic outlook,” she said.
With a slowdown in Australia’s housing market seemingly under way, and with higher energy bills yet to be truly felt by households, that risk appears to be intensifying even as economic conditions start to improve.
And should those risks become apparent in reality, it will create a significant drag on the broader Australian economy.
The coming quarters will be telling.
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