The following is a copy of a contributed commentary for the Australian Financial Review on Friday 6 December 2019.
Consumer have stopped spending
This week’s September quarter national accounts proved at least one thing – you can goad households toward the shopping malls, but you can’t make them spend.
Despite recent interest rate cuts and high tax refunds, consumer spending rose a paltry 0.1 per cent. That’s despite the fact real household disposable income surged by 2.3 per cent.
Instead, households chose to run up their savings.
Whether households eventually decide to spend some of this stashed-away cash will have a big bearing on the economy heading into 2020. After all, consumer spending accounts for almost 60 per cent of national output.
But there’s a good chance that households will see the cash for what it was – a one-off “windfall” that is more prudently saved than frittered away on more expensive Christmas gifts.
That’s especially so given the longer-run growth in income has been very weak and the outlook – beyond this quarter’s “sugar hit” tax refund – remains challenging.
Indeed, even allowing for the recent tax refund, real disposable household income has grown at an annualised rate of only 1.8 per cent over the past three years. It’s no wonder consumer spending has finally ground to a halt.
Low wage growth is no help
As the perhaps frustrated deputy Reserve Bank governor Guy Debelle noted in a speech recently, low wage growth appears to be the new norm.
The proportion of enterprise bargaining agreements providing annual wage rises of only 2 to 3 per cent, for example, has increased from 10 per cent earlier last decade to 60 per cent today. And the proportion offering wage gains of 3 per cent or more has fallen sharply.
Wage growth is weak despite strong employment growth partly because the rise in labour supply has been equally as strong. Immigration rates remain high and labour force participation among females and older workers – ironically perhaps due to growing household income pressures – continues to trend higher.
A likely slowdown in employment growth next year, if only because of the sustained downturn in housing construction, will also undermine hopes of stronger income growth.
RBA is relying on a wealth driven lift in consumer debt
Of course, the RBA has a solution – if we can’t get their incomes up anytime soon, let’s make households feel wealthier again and so more inclined to use their credit card. In recent RBA commentary, the once prudent institution has been loudly cheer-leading the recent revival in Sydney and Melbourne house prices, in the hope this will help boost now dormant consumer spending.
It’s also notable the sharemarket is at record highs, and richly priced relative to underlying earnings, as income investors are being forced to swallow hard and take on more risk to offset the miserable returns on bank deposits and fixed-income bonds.
To my mind, that’s really a sad indictment of the economy these days – we’ve been left to rely on ever higher asset prices – which are arguably already very expensive – to goad households into taking on more risk and adding to their already very high debt loads.
A better solution seems to be to focus on exactly why household income is so weak and what can be done about it. A much stronger economy would help but it’s the wrong approach to make this happen through significant further household re-leveraging.
Consumers are telling us they’re tapped out. Largely due to Australia’s very high housing costs by global standards – due to poor regional development policies – our households are already among the most indebted in the world and seem to be saying they just can’t take much more.
Is it not more prudent to allow households to nurse their strained balance sheets back to health rather than force more debt upon them – even at the expense of somewhat sluggish growth for a period ahead?
To my mind, through our undue reliance on monetary policy and already indebted households, we are too easily sacrificing longer-term financial stability concerns in the interests of bolstering a fundamentally unsound economy through ever more leverage.
It does not help that the Reserve Bank also persists in pursuing the highest mid-point inflation target in the developed world – which, judging from financial market pricing, few professional investors expect will be realised in the next decade.