Australians Shun Luxury to Focus on Essentials

By Elsa Ouattara

The recently released, but not widely circulated Household Expenditure Survey 2015-16 shows Australian’s are focused on housing, health and education spending but loath to extend their budget to discretionary items.

The Australian Bureau of Statistics survey is only conducted every six years, and the 2015-16 results released on September 13 show households remain the Achilles heel of the economy, as reasonable economic and employment growth fails to ignite spending beyond essential items.

Compared to 2009-10, households in the latest survey increased spending 25 per cent on housing, 26 per cent on domestic power and health expenses and 44 per cent on education. In contrast, less was spent on discretionary items such as furnishing, alcoholic beverages, communications, and transport.

Measures of household income growth:

Source: ABS & Citi Research

This does not come as a big surprise given the slow-down in income growth and higher inflation on some basics.

Between the two survey periods, household disposable income has continued a downward trend that commenced in 2008 with the onset of the global financial crisis. It is currently at just two per cent compared to above four per cent annual growth achieved between 2003 and 2007.

Further focusing consumer spending has been a 19 per cent increase in housing rent between the survey periods. Consumer price index data also shows that over the period electricity rose 43 per cent and medical, dental and hospital service by 41 per cent. By comparison the consumer price index on average was lower at 14 per cent.

While lower interest rates and reduced debt servicing burden should have provided a boost to spending it was counteracted by rising debt levels.

The trends leading to subdued discretionary spending may continue to play out as fundamentals like household debt, record-low wage inflation stuck at an annual rate of 1.9 per cent and low household disposable income, remain unfavourable.

As a counter, the strength of the labour market should support households, and make it less likely that aggregate consumer spending will weaken sharply. We expect consumer spending next year unchanged at 2.8 per cent.

Real GDP and unemployment rate

Source: ABS & Citi Research

Another data series we are watching closely is the monthly labour force release.

August labour force data was stronger than expected with the kicker being the upside surprise in full-time employment (40k). Despite this large increase the unemployment rate remained unchanged at 5.6 per cent. This is because the participation rate, which refers to people who are either employed or actively looking for a job, ticked higher. The unemployment rate was unchanged in New South Wales and Victoria, Queensland recorded a substantial decline. In contrast the unemployment rate increased in Western Australia.

We expect continued structural growth in employment in service industries related to health, education, tourism and hospitality, all of which could benefit further if the AUD is weaker. Overall unemployment is likely to remain above levels consistent with full employment for at least another year as we expect economic growth to be 2.4 percent in 2017 with an opportunity to move higher the following next year.

The Reserve Bank of Australia’s views the employment rate as the key metric. Despite the strong employment gain, the unemployment rate at 5.6 per cent continues to signal little concern for inflation. We continue to expect the RBA to tighten monetary policy late next year and to move cautiously on an upward trajectory for interest rates given high household debt and low income growth.

Elsa is an interest rate specialist for Citi Wealth Management