Goldman Sachs has this afternoon released research that focuses on a trend that is at the heart of its below consensus economic forecasts: weak household income growth.
According to Goldman, compensation of employees has remained soft in response to the ongoing weakness in the domestic labour market. It forecasts that compensation of employees will contribute just 2.6% to the 3.5% growth in disposable income growth [note its 2012-13 household income growth forecast is 5.0%], with the slowing economy, rising unemployment, and a buoyant Australian dollar all contributing to this weakness (see below charts).
Back in July, I showed that household income growth had slowed materially over recent years – a trend that would persist as long as Australia’s terms-of-trade continued to unwind from record highs (see next chart).
With income growth likely to remain weak for an extended period of time, it is hard to see how recent strong house price growth is sustainable, or how retail sales growth will rebound materially from their current depressed levels.
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