As part of the transition from the mining investment boom towards areas of domestic demand, a pickup in consumer spending was, and is, vital if Australia is to stay away from recession and register an era of decent economic growth.
The value of retail sales rose a decent 0.4 percent in August and by a solid 4.5 percent over the past year. To be sure, it is not as strong as the growth rate generally experienced prior to the Global Financial Crisis, but it is consistent with consumer spending growth, adding to the rate of overall economic growth and, with that, to employment. Overall, household consumption – which includes retail sales plus spending on a range of other household services (health, education, financial services, insurance and the like) – grew by 2.5 percent in real terms and was one of the largest contributors to the overall growth rate in the economy, albeit with growth still below the pre-global crisis pace. A critical factor behind what is a steady expansion in spending is low interest rates. In an endorsement of the e ffectiveness of interest rate cuts, consumers have had an improved cash flow on existing debt and had a lower threshold to borrowing when considering taking on new debt. Indeed, anyone with a mortgage taken out over a year or more ago (around one-third of the population) has seen the required monthly repayments fall sharply. For those with loans from five years ago, the interest payments on a given level of debt have e ffectively halved. Many mortgage holders have maintained the dollar level of their interest payments and are therefore well ahead in their repayment schedule. This means a faster rate of debt reduction for these borrowers and, with that, an ability to spend any income gains that accrue. Consumer spending has also been aided by a powerful wealth e ffect from generally rising house prices. While any accumulation of wealth from higher house prices does not readily translate to extra cash or income to the homeowner, there is a solid correlation between the rising house prices and rising growth rates in consumer spending. Rising house prices add to financial security which in turn encourages a reduction in savings and and consumption. This shows up clearly in the states where house prices have exhibited the strongest growth in recent years. In New South Wales and Victoria, where a house-price boom has been evident, growth in retail sales have been stronger than in Western Australia, South Australia and Tasmania, where house-price growth has been sluggish. One concern for consumer spending is the record low growth in wages. With the economy still soft and the mining slump still impacting on the economy, the unemployment rate has generally edged up over the past couple of years. This higher rate of unemployment, which is close to its highest level in over a decade, is making wages claims more di fficult to achieve. With wages growth low, household income growth is similarly constrained. This makes it more di fficult for consumers to ramp up their spending (unless they decide to run down their savings or add a little to their debt levels). With the mining investment slump still having a year or two to run before a bottom to that cycle is found, further sustained growth in household spending is essential if the economy is to keep growing and the unemployment rate to remain steady, let alone fall. The Reserve Bank knows this, which is why interest rates are likely to remain low for many months – even years – to come. The last thing the RBA would want to do is lift interest rates prematurely and choke o spending growth. Consumers remain cautious. While spending growth is below the boom prior to the global crisis, it is still solid enough to underpin the economy and with some luck, create enough jobs to see the unemployment rate stabilise at a little over six percent. Stephen Koukoulas is the Managing Director of Market Economics thekouk.com.au @ TheKouk