Aussie Consumer Sounds the Alarm

The increasingly poor state of the Australian economy and the Reserve Bank's failure to meet its objectives, combine to make further rate cuts inevitable. As we've previously outlined, this outcome is inescapable as further stimulus will need to be injected into the Australian economy for the RBA to even come close to meeting their full employment and inflation objectives.

Australian Retail Sales (M/M) October: 0.0% (exp 0.3%; prev 0.2%)

Australian retail sales for the month of October recorded no growth in value over the month, and annual retail sales growth fell to just 2.1% y/y. This is yet another set of data highlighting the dynamic outlined by yesterday’s national accounts, the private sector and in particular the consumer is weak and demand is anaemic.

Households remain cautious, despite interest rates being cut to a record low and tax cuts, and consumers are choosing to save more and reduce discretionary spending.

The average level of household debt is just under 2x average household income, excessive household indebtedness renders the Australian economy particularly vulnerable economic troubles. Households and hence consumption expenditure become highly sensitive to changes in the outlook for the economy and this is passing through to the retail sector. Consumer sentiment surveys outline that the Australian consumer is mired by worries about the economy and with wages going nowhere overindebted consumers are choosing to save more in a bid to pay down debt.

Despite house prices having risen again in Sydney and Melbourne, at present any positive wealth effect is counteracted by high household debt levels and weak income growth. Of course the positive wealth effect from a recovery in house prices, and the stimulus measures implemented to date take time to trickle down to the consumer and inevitably work with a lag. So the coming months will bring us more clarity on the drag on consumption due to over indebtedness. But at present, concerns about the outlook for the economy, job security and stagnant wage growth are outweighing any positive wealth effect and consumers are saving more in a bid to reduce debt levels.

Without income growth this dynamic is likely to persist for a protracted period even as house prices recover, hence weighing on the outlook for retail and consumption in Australia.

As outlined in yesterday’s break down of the national accounts data, the Australian government’s limited appetite for implementing a complementary fiscal stimulus package leaves the RBA doing the heavy lifting with respect to the Australian economy. And with the Reserve Bank currently a long way off meeting their goals of full employment and inflation within target range further stimulus is both necessary and likely.

Consequently, we still expect the RBA will ease again in February and once more in 2020 taking the cash rate to 0.25%, the effective lower bound.