Given consumer sentiment is average, & house prices are rebounding, we assume ~half the tax refunds are spent on retail, & another ~20% on other consumption, a relatively high ~0.7 marginal propensity to consume. This would boost retail sales in 19/20 by ~1%pt, with a temporary spike in Sep/Oct to ~5% y/y; & also lift real consumption in 2H-19 to above 2% y/y, after slumping in Q2-19 to a near GFC low of 1.4%. A key risk to our consumer outlook (1.8% in 2019, & 2.2% in 2020) is households save more, after the Q2 household savings ratio already dropped to 2.3%, the lowest since 2007, a small buffer if ‘caution’ returns (say trade wars lead to worries about unemployment). Indeed, the UBS Evidence Lab consumer survey showed a high 40% plan to save more in the next year. Furthermore, industry data suggests a disappointing recovery so far: July retail & August car sales surprisingly fell; surveyed retail sector business conditions collapsed to a record low in July; while listed company trading updates report retail conditions were getting slightly better through July & August, albeit still soft overall.
Overall, policy stimulus is here but the economy’s starting point keeps getting materially worse. Indeed, Q2 real GDP & consumption are ~weakest since the GFC, as nominal
household income slowed to 2.4% y/y, dragged by taxes jumping >7% y/y. While tax cuts & rate cuts will help, we expect rising unemployment & peaking wages to mean the economy won’t improve as much as the RBA forecast, or lift CPI to their target midpoint, without more stimulus. We still expect the RBA to cut 25bps in Oct-19, Feb-20 & May-20 to 0.25%; albeit conditional on expected weaker global GDP & further central bank easing, & the Government’s commitment to a Budget surplus means no near term fiscal stimulus. Meanwhile, if house prices surprisingly boom, we expect macroprudential tightening – albeit perhaps DTI this time – given regulators “stand ready”.
I reckon more of the tax cuts will be saved as global volatility, rising unemployment and falling wage growth spooks.
Pushing for surplus under these conditions will not lift confidence, it will end it.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
