Stephen Koukoulas of BS today forecasts a boom in consumer spending:
In the last few days, I have been participating at the Dun & Bradstreet Commercial Credit and Collections conferences.
One issue that has featured prominently in the discussion has been the position of the consumer or household sector. The so-called ‘cautious consumer’ is a feature of the Australian economy in the last couple of years which has contributed to very weak credit growth and an uptick in consumer financial stress.
These dynamics were seen to sit oddly with the general assessment that the Australian consumer and the household sector are in fine financial fettle.
A cold, hard examination of the data shows that household savings are being accumulated at a rapid rate, wealth is growing and in the March quarter it reached a record high, the household debt to income ratio is steadily falling as consumers continue to overpay their monthly mortgage requirements and we are about to clock up a thirteenth year where wages growth has exceeded the rate of inflation…the mix of lower debt, higher savings, and rising real wages means that consumers are increasingly ’cashed up’ to spend when circumstances permit.
They are ready to unleash a spending lift, when circumstances allow.
Fair enough. Problem is, circumstances won’t allow it for quite a while.
First, the ratio of household debt to disposable income has eased a touch but it’s big stretch to conclude deleveraging has passed:
Second, national disposable income per capita is falling. The reason why is because the Terms of Trade (ToT) are grinding lower as the China boom passes. That means that the pay rise Australia has enjoyed over the past decade owing to expensive commodity prices is reversing.
This will continue so long as the ToT falls, which is likely for the next few years. To get some idea of how big the reversal is, Treasury estimates that the ToT pay rise accounted for half of our income growth since the turn of the century:
So we’ll be taking a pay cut for some time to come. This can be offset by increased productivity growth, labour utilisation and other things but they’ll all be working against the ToT headwind. Remember, the dollar does not change the terms of trade. If it falls it will boost Australian dollar income but not purchasing power and any gains will be offset by rising tradable prices.
In short, the cold hard facts show precisely why those waiting for an explosion in household consumption had better settle into a very comfy chair.
