Last week’s poor retail sales data is reflective of broader conditions in the Australian economy which pose a threat to domestic consumption, according to Credit Suisse.
And the bank’s research analysts warned that a downturn in housing sentiment could have a material impact on growth, noting that housing is “the key driver” of consumer spending in Australia.
Retail sales in September came in flat, missing forecasts of a 0.4% monthly gain which saw annual growth fall to a multi-year low of 1.4%.
“Historically, falling house prices compound the cash flow squeeze on consumers, leading to spending retrenchment,” Credit Suisse said.
As a result, the bank is sticking to its forecast that the RBA will continue to adopt a more dovish stance.
“We remain of the view that the Bank is unlikely to raise rates any time soon, and indeed is likely to ponder cutting rates in the year ahead.”
In a research note called “worrying signs for the consumer”, the analysts drew a strong correlation between retail sales and house price growth across the states:
The argument could be made that the wealth effect from housing has been a key supporting factor for domestic consumption, given that recent house price appreciation has easily outpaced wage growth over the same time period.
Despite the recent Sydney-led slowdown in house price growth — data from CoreLogic shows house prices across all capital cities rose by 7.1% for the 12 months to October.
That can be contrasted against consistently weak wage growth, with the most recent data to August showing the annual rate of growth holding steady at just 1.94%. The latest quarterly wage data will be released by the ABS next Wednesday.
And while the Australian economy has generated consistently strong employment growth this year, “the linkage between sales and employment growth across states is less clear”, Credit Suisse said.
The Credit Suisse analysts pointed to the bank’s cash flow and sentiment index (CSI), which continues to indicate that headwinds to consumer spending remain prevalent.
The CSI combines key drivers of household discretionary cash flow – including incomes (less taxes), energy costs and credit card data — with home-buying sentiment from Westpac’s monthly consumer confidence survey.
“To be sure, the CSI has been pointing to weak spending growth for quite a while – but spending growth has been remarkably resilient despite this signal,” Credit Suisse said.
However, rather than conclude the CSI model is broken, the bank’s analysts argue that spending is being upheld by a delayed response in house price falls, despite a recent decline in the consumer sentiment towards property.
And the main reason for that delay? The impact of foreign buyers in the Australian housing market.
It follows research from Credit Suisse last month based on Freedom of Information Requests to state governments, where the bank said foreign buyers have accounted for more than 25% of new homes purchased in NSW.
The research also suggested that the Chinese government crackdown on capital outflows has had a minimal impact on foreign buying activity in Australian property.
“It is the strength of foreign buying which has kept housing demand and prices from falling, forestalling the negative wealth and credit effects that we have seen in previous cycles,” Credit Suisse said.
In view of the headwinds to household cashflow due to low wage growth, and a potential slowdown in house price growth, the bank’s analysts remain pessimistic about consumption drivers in the near-term.
This chart shows the recent divergence between domestic consumption and the CSI model, plotted one year in advance:
“There is clear evidence that weakness in the housing sector, stagnant real wages and high debt levels are weighing on consumer spending and pricing power,” Credit Suisse said.
The bank retains its view that further rate cuts may be in store, and speculated that such a scenario is being “more seriously considered” by RBA officials.