At some point, the RBA will probably lower its cash rate further, and while the impact on the economy may not be particularly great, at least it could go some way to arresting the fading strength in household spending.
Signs are emerging that Australian economic growth is starting to lose momentum, even as economic growth signs take a more positive turn in our single biggest trading partner, China.
The loss of growth momentum in Australia is down to a range of factors influencing and affecting household spending mostly, including long-term low wages growth, stagnating change in household wealth, and slow effective tightening in monetary conditions with no solid indication yet that the Reserve Bank of Australia (RBA) is prepared to try and arrest the process by cutting the cash rate. Even the pre-election budget next Tuesday is likely to be as much about taking as giving from households as the Government tries to chart a course for future budget deficits that at least delays any move by international ratings agencies cutting Australia’s AAA sovereign credit rating.
Australian households are spending less confidently than they did in the second half of 2015. The Westpac consumer sentiment index has weakened in March and April on a scale more normally associated with an interest rate hiking announcement by the RBA, falling respectively by 2.2% and then by 4.4%. Actual retail sales rose by only 0.3% in January and were flat in February and early indications are that March (data due next week) was quite soft too.
Spending on housing has been much patchier than it was through much of 2015 too. There are still some suburbs of Sydney and Melbourne experiencing strong demand, but with other suburbs experiencing much weaker demand and falling prices. Overall, Australian house prices are flat-lining contributing little to growth in total household wealth.
What a difference a year makes to housing and shares
On the topic of household wealth, going back 12 months ago housing and the Australian sharemarket were both showing double-digit annual price change. In April 2015 the ASX 200 was trading a touch short of 6000. In late-April this year it is sub 5300, even though it has made up ground over the past two months. Nationally, house prices are still higher currently than they were in April last year, but rapidly declining towards low single digit annual growth. Growth in household wealth has decelerated over the past year and is still decelerating. Rising household wealth was providing possibly the main reason for households to spend more freely back in mid-2015, but slowing growth in household wealth is providing reason for households to be more cautious towards mid-2016.
Recent employment growth not translating to households spending
Slow growth in household income remains a constraint on household spending. Despite periodic spurts of growth in employment, wages growth has remained stuck in an unusually subdued low 2% annual groove for more than a year now. There is little sign of any improvement in wages growth this year. The occasional strong phases in employment growth have been mostly in lower-paid occupations. The order of household spending growth necessary to help sustain real economic growth anywhere near 3% - where it was late in 2015 – can only be achieved by households reducing the proportion of their income that they save and that occurred in 2015 mostly because rising wealth and a sense of financial well-being allowed households to ignore the fact that their wages were growing very slowly. In effect, households were prepared to throw caution to the wind last year, but reasons are mounting why they should be more cautious this year.
Policymakers should recognise cautious households…
This developing change in households’ attitude and spending needs to be recognised by policymakers and policy changes should occur. In the case of monetary policy something quite counter-productive has been occurring. Since late 2015, Australian lenders have been tightening their lending criteria and have been edging up lending interest rates. These changes reflect official macro-prudential guidance from APRA in consultation with the RBA. The moves have tempered and slowed investor demand for housing, a positive development for the stability of the financial system as there were signs developing of excessive price escalation in housing back in 2015 that left unchecked might generate collapsing house prices potentially compromising the safety of Australia’s banks.
…though the RBA has so far failed to act
The problem is that good prudential policy is running exactly counter to what is required from monetary policy at present. As the RBA repeatedly says in its monthly statements monetary policy needs to be very accommodating given that inflation continues to track very low and that it is desirable that the economy grow faster for a period. Slowly tightening monetary is definitely not needed, as it will reinforce the growing caution developing in the household sector and greatly increase the likelihood that economic growth loses momentum.
At some point, the RBA will probably lower its cash rate further, and while the impact on the economy may not be particularly great, at least it could go some way to arresting the fading strength in household spending. In the meantime, investors may want to remain relatively cautious to companies dependent upon prospects for Australian housing and retail spending. For the time being, China’s growth prospects, especially given the repeated easing of monetary policy over the past year and freer government spending, look stronger than prospects for Australian domestic demand.
Altair Asset Management (Altair) is a high conviction, active Australian equities manager whose investment philosophy is based on understanding the drivers and impact of change. Altair applies macro thematic research to uncover trends which are...
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