- Australian retail sales volumes grew just 0.2% in the March quarter, and will only marginally add to Q1 GDP growth.
- Households have diverted more money from saving to spending in recent years to help support consumption levels, but this cannot last forever.
- The RBA continues to describe the outlook for household consumption as “one continuing source of uncertainty”.
Australian retail sales ended the March quarter with a whimper, falling marginally in seasonally adjusted terms as strength in food retailing was offset by weakness in discretionary areas.
The soft result, below expectations for an increase of 0.2%, saw nominal sales lift by just 0.6% over the March quarter. With retail price inflation rising 0.4% over the same period, it meant that real retail sales — measured in volumes — increased by just 0.2%, down from 0.8% in the prior quarter.
As a result, it will only marginally add to Australian economic growth in the March quarter.
The chart below from the National Australia Bank (NAB) helps explain why retail sales have been so weak in recent years despite strong employment and population growth.
It shows annual growth in real consumption per capita — including both spending on goods and services once price changes have been removed — overlaid against annual growth in real compensation per Australian worker, essentially average wage levels less inflation.
The chart also shows Australia’s household savings ratio, the amount of disposable income saved by the average family.
While real consumption growth per capita has managed to hold in positive territory in recent years, albeit well below levels seen in the past, real compensation levels per employee have not, largely remaining flat to lower in annualised terms since Australia’s terms of trade peaked some six years ago.
The weakness in wages has meant that households have had to divert more disposable income away from saving to spending, resulting in the household savings ratios steady decline over the same period.
In essence, by spending more and saving less, it’s managed to sustain consumption growth.
However, in the absence of an unexpected and unlikely borrowing binge by households, the pattern of recent years cannot go on forever. Either income levels need to lift or spending levels will need to fall.
While income tax cuts will undoubtedly help, what really needs to happen is an acceleration in wage growth.
With Australia’s unemployment and underemployment rates indicating that there’s still an abundance or underutilised workers in Australia, the prospects of a meaningful lift in wage pressures in the period ahead appears remote at best.
Given that outlook, it’s little surprise that few expect household spending growth will return to the levels seen before the global financial crisis, especially with household debt sitting at the highest level on record as a percentage of disposable income.
Throw in falling house prices in Sydney and Melbourne, and the outlook for spending becomes even murkier at a time when home prices in Sydney and Melbourne are falling.
This explains why the Reserve Bank of Australia (RBA) deems the outlook for household consumption as “one continuing source of uncertainty”.
“Wages and employment growth are key components of household income growth, and uncertainty about the outlook for household income growth translates into uncertainty about household consumption and so GDP,” it said in its quarterly statement on monetary policy (SoMP) released last week.
“Another key source of risk to consumption growth is that high levels of debt are likely to increase the sensitivity of households’ consumption decisions to changes in their income or wealth.”
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