Don’t bank on a consumer cash splash

Consumer sentiment has recovered to its pre-budget levels but slow wage growth and rising unemployment mean a sustained increase in household spending is unlikely to follow.

Could the household sector be ready to turn the corner? Although the budget remains a noose around the government’s neck, measures of consumer sentiment have regained their post-budget losses. But will consumer sentiment be enough to overcome declining real wages and a soft labour market?

The ANZ-Roy Morgan consumer sentiment index rose further over the past week and is now at its highest level since January, and a touch higher than before the budget.

“The good news is that the headline impact of the budget appears to be temporary and the more enduring features of the economy, such as rising share and house prices, job creation and a stable world economy are now driving consumer attitudes to spending and finances,” said ANZ chief economist Warren Hogan.

Yet on the whole the June quarter has not been a pretty one for Australian households and job creation remains poor. Whether we can attribute this directly to the budget is debatable; nevertheless, spending has slowed rapidly over the last four months.

Retail sales -- our most timely measure of consumer activity -- declined in both April and May, and quarterly household consumption is set to fall for the first time since the 2008 December quarter. Unless activity in June increases sharply or there are sizeable upward revisions for April and May, household spending could decline by at least 0.5 per cent in the June quarter.

A weaker household sector, combined with an anticipated decline in mining investment and government spending and a less-anticipated fall in exports, leaves Australia facing its first contractionary quarter since March 2011. A lot will be riding on inventories and the change in export prices.

Exports are expected to recover quickly with Chinese demand supporting activity, but mining investment will continue to deteriorate over the next few years. The public sector is set to contribute to growth but only to a minor degree.

Meanwhile, the household sector is a big unknown. Will people continue to spend as they did throughout 2013? Did the recent slowdown reflect the budget -- or soft wage and employment outcomes?

Perhaps the best place to start is to look at the potential risks for household spending.

Rising asset prices continue to support household activity but this is partially offset by rising indebtedness, which has encouraged some households to take a cautious approach to spending and investment. The savings ratio remains elevated, although it has begun to slow in recent quarters, which may reflect a gradual tightening of household budgets due to soft wage growth.

The risks to the property sector are primarily to the downside, particularly given the level of speculation by investors in the Melbourne and Sydney markets. Low interest rates continue to support activity, and have brought forward some purchases, but this level of activity has proved unsustainable during previous housing cycles (How investors burned a hole in the housing market, July 11).

The risks for the ASX 200 are probably to the downside, particularly for the mining sector and our major banks. A slowdown in household lending activity will hit the banks, while our mining sector is beginning to struggle under the weight of falling commodity prices and some mounting concerns regarding the Chinese economy.

But asset prices play only a minor role in near-term consumer spending decisions. These decisions will largely be driven by employment and wage expectations and this is the primary reason why I remain fairly pessimistic regarding household spending over the next couple of years.

Real wages fell in the March quarter and nominal wages are rising at their slowest pace since the data began in 1998. Wage growth should ease further over the next year due to increasing spare capacity across the labour market.

The unemployment rate continues to tick higher, and research from ANZ and NAB suggest the mining sector could cut as many as 75,000 to 100,000 jobs over the next couple of years (The jobs picture is starting to look ugly, July 2). Employment growth has been poor since the beginning of the global financial crisis and federal government forecasts suggest that this will continue over the next five years.

On the upside, population growth remains strong and continues to underpin economic activity. Population growth continues to hide the fact that GDP and consumption per capita has slowed significantly over the past five years.

A high Australian dollar also supports imports and increases household purchasing power; although this is partially offset by less investment and domestic production, which continues to weigh on domestic incomes.

Despite the recent pick-up in sentiment, the outlook for household spending remains fairly subdued. I expect a bit of a rebound in September, mainly due to the very soft June quarter data, but households will be unable to maintain that momentum while wage growth and employment remains weak.

The pick-up in consumer sentiment is a welcome sign -- certainly better than the alternative -- but it is difficult to see how households can continue to drive growth while real wages decline. 

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