Consumer spending accounts for a whopping 53 per cent of the economy (real GDP), so the degree to which households decide to spend or save is critical to the economic outlook. A major positive for spending of late is rising household wealth – which, as seen in chart below, tends to be associated with a lower household saving ratio. That said, we should not overestimate the wealth impact, as weak income growth poses a major offsetting downside risk to consumer spending.
That said, the chart below shows that the saving ratio has already been in decline for several years, and this has not been sufficient to allow consumer spending to grow at a faster pace than GDP – due to relatively weak growth in household disposable income (HDI).
Between the March quarter 2011 and the June quarter 2014, for example, the household saving rate fell from 11.6% to 9.4% of HDI, yet real consumer spending only grew at an annualised pace of 2.3% – compared with 3.2% growth in real GDP. That was because real HDI over this period only grew at an annualised rate of 1.5%.
It’s hard to see real HDI growing faster than GDP anytime soon. Importantly, the weakening $A is now acting to increase consumer prices which will crimp growth in real incomes. Today’s relatively high unemployment rate and very slow growth in nominal wages will also limit income growth. What’s really needed to boost household income is a decent rebound in employment growth, though so far at least (and notwithstanding last month’s “catch-up” surge in reported employment), hiring indicators still remain relatively subdued.
Accordingly, even though the household saving rate may well decline further in the coming year – meaning households will spend more of what they earn – weak income growth could still cause consumer spending to grow at a slower pace than GDP. If so, it will add to upward pressure on the unemployment rate, and downward pressure on both interest rates and the A$.
 Using the consumer spending price deflator.