Labour market is weak: CBA Economics

Real wages growth will remain low while the labour market is weak.  Real household disposable income growth will continue to run at a below‑average pace and therefore act as a headwind to consumer spending.

• A run down in the savings ratio, rising wealth positions, a lower Aussie dollar redirecting retail spending onshore and more appetite for household borrowing are needed to drive momentum in consumer spending.
• We expect consumer spending growth of around 2.5% and 3.0% in 2014/15 and 2015/16 respectively.  This compares to the ten‑year average of 3.0%.

The outlook for household consumption has been a key area of uncertainty over recent months.  Retail outcomes have been mixed and consumer sentiment remains fragile.  The concern for the RBA is determining if the waning in consumption growth momentum will be a lasting issue, particularly if households have reassessed expected economic conditions to be worse than previously anticipated.  A return to more “average” consumer spending outcomes is one of the forecast components of the mining to non‑mining growth transition.  The RBA expect consumer spending growth to improve considerably by 2016 because of an increase in household wealth and moderate income growth.

Wages growth is currently running at the slowest level for 16 years and real wages are declining.  If real wages growth is negative, what will drive momentum in consumer spending growth?

Our forecasts for moderate consumer spending growth are based on the assumption that:

1.  There will be some run‑down in the savings ratio
2.  Household balance sheets will remain in good shape
3.  A lower Australian dollar will redirect some retail spending onshore
4.  Consumer borrowing growth will fund additional spending

The risk from weak income growth

Changes in household disposable income growth are a key factor in determining potential changes in consumer spending.  The importance of income growth to household spending means that it is normal for consumer spending and household disposable income growth to run in similar cyclical patterns.

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