Aussie consumers send slowdown signal

Nestled within today’s Westpac consumer confidence report is further confirmation that heavily indebted Australians are increasingly worried about the domestic outlook as consumers have become more risk-averse in terms of the best place to put new savings than they were during the financial crisis 

Date showed 55% of respondents nominating safe options such as bank deposits, superannuation or paying down debt as the best place for savings, and only 9% of respondents favoured real estate, which has fallen from 28% four years ago and is now at a record low going as far back as 1974. Matthew Hassan, Senior Economist at Westpac, said “The mix is more risk-averse than at the height of the global financial crisis in 2008 and highlights the risk that a move by households to increase savings rates could further undermine consumer demand”.

Private consumption is a big driver behind the Australian economy and historically represents around 60% of GDP. This means the outlook for household spending is very important in determining the future path of the Australian economy. As we have previously highlighted, the outlook surrounding the consumer in Australia remains fragile, which will see the RBA forced into a corner where there is no option but to cut rates, despite their reluctance. The RBA is banking on employment strengthening and wage growth coming through to offset the negative wealth effect and consequent hit to consumption due to falling property prices.

In our view, the RBA is too optimistic and will need to cut the cash rate, but until there is evidence of labour market strength tapering off the RBA will be less inclined to cut rates.

The multiplier effects of house price declines on the economy are yet to be felt and as declines continue, they will intensify. The housing slowdown will feed back to the real economy through the negative wealth effect which will continue to weigh on overleveraged households’ consumption and result in weaker GDP growth. With the current savings ratio near decade lows, consumers will no longer be able to hold up spending habits as asset prices continue to fall. House prices have continued to fall throughout the first quarter of 2019, on that basis it doesn’t look like reprieve is on the horizon. Employment will not continue to hold up as confidence is eroded and growth continues to lose momentum. The labour market remains resilient, but unemployment is a lagging indicator, so the data only gives us a rear-mirror view on the health of the labour market. There are a host of leading indicators that point to a potential slowdown in hiring ahead, and a rise in unemployment.

Continued weakness in consumer confidence is another indicator, amongst many we have already highlighted, showing that policymakers at the RBA, and in the government will need to step in with a policy response using both the fiscal and monetary arrows in their stimulus quiver.