Hello Australia, you're spending more

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If there was one surprise to come from today’s Australian Q3 GDP report, it was the strength of household consumption, the largest component of the Australian economy,

Household expenditure – spending on goods and services – rose by 0.73% to a record level of $228.84 billion, adding 0.4 percentage points to the quarterly headline figure of 0.9%. The increase, the second largest in percentage terms in the past two years, left household consumption up 2.7% from a year earlier, the fastest growth seen since the June quarter last year.

Although well below pre-GFC levels – in the two years to 2008 it averaged 4.7% – it was still a robust result given significant headwinds facing households at present such as record-low wages growth, toppy house prices, high levels of indebtedness and still-elevated levels of unemployment, along with slowing population growth.

However, perhaps the small uptick shouldn’t come as a surprise given the recent improvement across Australia’s labour market.

As the chart below reveals, a reasonable relationship exists between annual employment growth and annual change in household consumption levels.

While it’s not a perfect relationship, something demonstrated over the past two years, the general rule is that as employment growth accelerates so too does consumption. And alongside new workers with more money to spend, others already in jobs see the labour market improving and feel more confident about their own job security, allowing them to spend more freely.

While there are other factors that can influence consumption expenditure – population growth, taxation, household debt levels, confidence in the government and income growth, among others – having a job, and job security, is almost certainly the most influential factor in determining household spending patterns.

Although serious doubts about the reliability of the ABS’ seasonally-adjusted jobs figures persist, its clear from other supplementary labour market indicators that labour market conditions are improving. The services sector is starting to hum thanks the lower Australian dollar and falling unemployment.

Should the historic relationship between employment growth and consumption hold true, with labour market conditions continuing to improve, perhaps Australia’s domestic economic growth, excluding external trade flows, may turn out to be stronger in the quarters ahead than many currently predict.

Australian economic growth, like most developed economies, is dominated by household expenditure. With the household savings rate at a still-elevated level of 9% and unemployment trending lower, there’s plenty of spending power still waiting on the sidelines.

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