08 Sep 2016
Australian Head of Economic Research
Consumer spending has been one of the clear growth engines in an otherwise sluggish Australian economy over the past two years.
It’s also likely to be one of the key drivers for the remainder of 2016.
With growth from the upswing in housing construction having peaked, and ongoing headwinds across business investment, the consumer has been left as a lonely driver of private demand within the economy.
And with elevated concerns about Australia’s AAA credit rating, fiscal restraint is likely to prevent a significant spending boost from state and federal governments.
But consumers’ outperformance amid a sluggish economy is hardly a new trend.
For the past two years, consumer spending has grown at between 2.75--3 per cent, outpacing overall economic growth which has averaged between 2.25 -2.5 per cent.
This trend is likely to continue, despite a slowdown in household income growth, and with wage growth falling to an 18-year low.
But how can consumer spending continue to grow with such weak domestic income growth?
The answer lies in three key factors supporting spending: more people; lower prices; and reduced savings.
Firstly, more people are shopping in Australia. Whether it’s a record number of international tourist arrivals, or more people holidaying at home in Australia, the fall in the currency from parity has made Australia an attractive destination to visit.
Secondly, Australia’s population growth is high relative to the rest of the world; a trend that has helped buoy consumer spending. The Australian dollar has fallen a long way, after a stretch above parity in early 2013.
But there has been a strengthening from the lows reached earlier this year. It’s still a currency that’s attractive for global talent – including Australians contemplating overseas moves. Indeed, recent falls in the UK Pound following Brexit suggests Australia will remain an attractive destination for skilled migrants, not just holidaymakers.
Finally, lower prices, or weak inflation, for some key household items are helping consumers spend more elsewhere. Petrol prices have declined, and are delivering a saving equivalent to a 0.25 per cent rate cut – but without the reduction in income for savers that comes when the Reserve Bank of Australia cuts rates. Rents are rising at their slowest pace in 22 years, allowing income rises to be spent elsewhere.
The savings rate has been slowly gliding lower over the past few years, allowing consumers to lift their spending at a faster pace than gains in income. There are a mix of factors contributing to the decline, including gains in wealth from rising house prices, demographic ageing, and shifts in the employment mix across the economy.
A number of these trends are expected to continue, with consumers forecast to contribute just over half of all economic growth in 2017; a welcome reprieve while Australia rides out the tail end of the wind-down in mining investment and waits for other business sectors to show stronger signs of recovery.
For a full copy of the report “Aussie Macro Moment RBA Statement on Monetary Policy” please contact your Macquarie representative.