Spending growth was soft in March, but that shouldn’t detract from a strong first quarter for the household sector. Low interest rates are supporting growth, but with budget cuts looming, will the cautious consumer return?
Retail sales rose by 0.1 per cent in March, missing market expectations, to be 5.7 per cent higher over the year. Nevertheless, growth in the March quarter has been strong and points to a solid contribution to GDP growth.
On a quarterly basis, retail volumes rose by 1.2 per cent in the March quarter to be 3.2 per cent higher of the year. Based on the long-run relationship between retail sales and consumption in the national accounts, we could see consumption growth of around 1 to 1.2 per cent when GDP is released.
Growth was driven by household goods (up 3.5 per cent); cafes, restaurants and take away (up 3.1 per cent); and food retailing (up 0.8 per cent). These more than offset declines in clothing and footwear and department store spending.
At the state level, New South Wales continues to set the pace, rising by 2.6 per cent in March to be 5.4 per cent higher over the year. Growth was also strong in both Victoria and Queensland.
Spending fell in South Australia, while trade volumes in Western Australia declined by 0.5 per cent over the year. The household sector is certainly feeling the end of the mining boom.
Low interest rates continue to support household spending, but is this level of growth sustainable?
As strong as recent data has been, there is certainly reason to be pessimistic about the outlook for the household sector. Unemployment remains elevated -- particularly among young Australians -- and wage growth has been soft. With the baby boomers beginning to retire, participation in the labour force is also on the decline.
Spending has been supported by lower savings to offset soft income growth. But a more cautious approach may be in order after the federal budget is released next Tuesday.
The deficit tax (which will hit Australia’s upper and upper-middle classes with either a 1 percentage point or 2 percentage point increase in marginal tax rates) and welfare cuts should weigh on consumer spending over the next few years.
Although welfare cuts in 2014/15 are likely to be fairly minor, the biggest immediate concern is a loss of consumer confidence. The ANZ-Roy Morgan consumer confidence measure has already declined to its lowest level in five years.
Households may have overreacted to initial budget leaks but it shows how sensitive they are to a change in conditions. When income growth is soft and job security is weak it doesn’t take much for households to begin tightening their belts.
On that basis I see momentum slowing significantly across the second half of 2014. Low interest rates will continue to support spending, but there may be a reluctance by households to take on additional risks or make big purchases.
Despite a weak result in March, household spending has been strong throughout the quarter and will make a solid contribution to GDP growth. But spending is set to slow over the second half of 2014 as higher taxes and welfare cuts take money directly out of household’s pockets.