Australia's changing spending patterns

Commsec has today produced an interesting note on Australia’s changing spending patterns, and the outlook for the future:

While consumer spending picked up late in 2013 – especially once the election was out of the road – over the year as a whole, growth in spending was tepid. Real (inflation-adjusted) growth of spending was just 2 per cent, the slowest growth since the GFC-affected year of 2009.

While the good news is that consumers are spending again, the bad news for many businesses is that spending habits continue to change.

Over 2013, real spending on liquor fell by 1.9 per cent – the second straight year of declines. Whether the preference for quality over quantity continues remains to be seen, but alcohol has certainly been taking up a smaller share of household budgets for some time.

A similar trend has occurred with gambling. The share of the household budget being devoted to gambling has fallen to the lowest level in almost a decade.  Interestingly the share of household budgets being taken up by so-called essentials – food, clothing, alcohol, tobacco and transport – hit a record low of 27.4 per cent in 2013. In the early 1960s, the average Aussie household was devoting almost half of spending on these so-called “essentials”. Clearly the definition of “essential” has changed over time.

Health, education, housing, attending sporting events & concerts and electricity and gas bills are all taking greater shares of household budgets. The dollars being taken up by either paying the weekly rent or mortgage repayments now account for around 20 per cent of consumer spending, up from 17 per cent a decade ago and 8 per cent in the 1960s.

Disposable income has grown at a faster rate than total income over the past year although both are growing at a slower rate than the decade average. While wage growth has slowed, Aussies are paying out less in interest costs, saving around $7 billion over 2013. In fact consumer debt interest hit a 6½-year low in 2013, allowing consumers to lift spending.

The other boost to incomes and spending over 2013 was from workers compensation and social security payments. Income from workers compensation rose by 8.5 per cent to a record $10 billion in 2013 while social assistance payments lifted 5.0 per cent to a record $122.3 billion.

There is a lot of focus on what is “normal” now, compared with the past – the “new normal”. In the past, spending grew at an average pace of around 6 per cent a year with incomes up around 7 per cent. But with annual wage growth likely to be around 3.0-3.5 per cent over the next year or so, and interest payments expected to lift in coming years as the cash rate rises from historic lows, income growth, and in turn spending growth, may prove far slower.

Annual income and spending growth are more likely to be in the 4-6 per cent range in coming years than 6-8 per cent. In recent years, Aussie incomes and spending levels have been boosted by lower interest rates and a sharply higher Aussie dollar. But short of another leg down in interest rates and a resurgent Aussie dollar, (say, lifting to parity again), then there is a shortage of candidates lifting growth of household incomes and spending.

The growth in spending on housing – which has risen from around 8% in the early-1960s to around 20% currently – is particularly stunning, and is broadly supported by the below chart published today on the Business Day Market’s Blog:

Commsec’s forecast that “annual income and spending growth are more likely to be in the 4-6 per cent range” also looks a little optimistic in light of the recent slump in per capita household disposable income growth – which is likely to worsen as the terms-of-trade trends lower (see next chart).

As well as the Australian Treasury’s forecast that average per capita income growth would halve over the next decade to the lowest rate of growth experienced in 50 years, again weighed down by the falling terms-of-trade (see next chart).

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