While some such as HSBC think Australian household incomes and spending levels will improve in the next few years, not everyone shares such as rosy view.
Especially among investment banks.
They’re bearish on what’s coming next.
Take Morgan Stanley’s Australian equity strategy team as a prime example of this view. In a note released earlier this week, it said that a consumption crunch is about to hit Australia.
“The consumer is not relaxed and businesses are struggling to relate, (with) recent reports from our sector teams adding support to our crunch time thesis around the domestic cycle cash flow squeeze,” the bank lead off with in its report entitled “the tiger is at the gate”.
Driven by a variety of factors, it suggests that household finances are about to get squeezed further.
“Discretionary spending is being crunched by falling incomes, cost of living inflation, and broadening credit rationing that is withdrawing consumer liquidity,” the bank says.
Think record-low wage growth, higher household debt and increased utility bills, among other factors, that have or will impact the spending power of households in the period ahead.
It’s enough to make one squirm just a little bit, particularly when you’re talking about household spending, the largest part of the Australian economy at a smidge under 60%.
And it expects those pressures are about to become even more intense given recent repricing of mortgage rates by Australian lenders, done largely to suffice regulatory changes and widen margins ahead of the introduction of Australia’s bank tax, along with a slowdown in Australia’s housing market and an inability to draw down on household savings much further.
“There is less of a savings buffer to absorb this real income hit, given the savings rate has already fallen from 10% in late 2011 to below 5% in the first quarter of this year,” Morgan Stanley says.
“In addition, the housing cycle tends to be a key support for the consumer through credit and wealth effects, which looks to have peaked, while the macroprudential cycle is also withdrawing disposable cash flows — whether through mortgage repricing or the shift from interest-only to amortising mortgages.
“All up, we think it will be difficult for consumers to continue to live at or beyond their means.”
It’s more than a little downbeat, but it’s not the only one saying that.
It largely reflects the same view as UBS who said that recent analysis of household cashflow — reflecting ‘free cash’ after taxes and debt interest payments, and after their utilities and petrol costs — were “revealing”.
“In short, cashflow has slumped into early 2017,” the bank said.
“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, a combination of weak wage growth and higher costs are squeezing household finances and their ability to spend, mirroring the same factors being cited by Morgan Stanley.
And, like Morgan Stanley, UBS is also of the view that households will be unable to draw down on their savings from much longer which, accompanying a slowdown in Australia’s housing market, will likely weigh on spending levels in the quarters ahead.
“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 said.
“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.”
Two fairly pessimistic views, but, to this point, there’s still plenty of uncertainty as to what lies ahead.
One suspects that the scale and speed of Australia’s expected housing market slowdown, and whether the recent improvement in labour market conditions, will have a large say as to what happens next.
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