IT IS ALL DOWN TO CONSUMERS
By Denise Slattery
Whilst the coalition has managed to pass their $144 billion personal income tax package through the Senate, debate continues with regards to the proposed cut in the company tax rate. Tax cuts look to be the government´s solution to low wage growth.
The Australian economy is growing steadily. In the first quarter of the year, Gross Domestic Product (GDP) saw a 1% increase in real GDP. Commodity exports led the growth, with government and business spending also increasing. Yet, while businesses and governments are spending, consumer consumption is weak. Slowing consumer spending is a major issue as about 60% of Australia´s economic output comes from the consumer.
As you can see in the graph below, most of Australia’s growth in recent years has come from consumer spending and housing construction.
Low wage growth, high debt, and higher costs of living have meant that households are dipping into their savings to make ends meet. As you can see in the chart below, the savings rate has been trending down over the last few years.
Consumer spending could slow even more, as property prices keep sliding down. Decreasing property prices could have a negative impact on the wealth effect. You see, when properties appreciate, households feel they are sitting on a lot of money, so they spend more. If property prices start falling this could mean households spend less.
It may be that home prices will continue to fall, as it becomes more difficult for borrowers to obtain finance.
As Westpac recently reported in their June 2018 Market Outlook:
‘Weaknesses remain, particularly around the consumer and housing. The consumer is vulnerable at a time of weak wages growth, high debt levels and slipping house prices. The housing sector is cooling as lending conditions tighten, with prices easing back from recent highs. Auction clearance rates in Sydney and Melbourne have slipped further to now be at below average levels.
‘Consumer spending is choppy (up only 0.3% in the March quarter) and ‘slightly below trend’ (up 2.9% over the year). Even the current pace of consumer spending appears unsustainable over the forecast period – we expect a slowing to 2.5% for 2018 and 2019. Spending has been supported by a drop in the savings rate, declining to 2.1% from 4.0% a year ago, with the scope for a further run-down diminished.
‘With weaknesses in consumer spending and housing, we expect GDP growth to moderate to 2.7% in the year to December 2018 and then slip to a below-trend 2.5% for December 2019.’
If consumers decrease spending, we could see a real economic slowdown. Also, any increases in interest rates or unemployment could put Australia´s economic track record to the test.
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