Rates leave most treading water
THE path back to economic growth is likely to be more uncomfortable than the slowdown for many households, as the Reserve Bank of Australia moves the cash rate up to "normal" settings and employers keep salaries in the deep freeze.
Consumers have taken the RBA's decision to begin easing monetary policy off emergency settings in their stride so far, and a WestpacMelbourne Institute survey shows confidence is at a two-year high.
This joie de vivre was helped by a drop in the official unemployment rate. However, the relief of knowing one's job is safer than it was six months ago is likely to be tempered by the fact that wages are barely keeping pace with inflation. Most households are treading water when it comes to income, while interest rate payments now look likely to increase faster than expected even a week ago.
RBA governor Glenn Stevens confirmed during the week that the economy was on track to record close to normal growth next year and that the cash rate was on its way back to neutral, which is generally regarded as around 5.25 per cent.
Financial markets now expect the cash rate to move up from 3.25 per cent to 5.25 per cent by the end of next year.
Some private-sector economists believe the RBA will move slower, but the shared forecast is for a series of rate rises beginning with a possible shift of 0.5 of a per cent to 3.75 per cent on Melbourne Cup day, November 3.
While household debt-to-income ratios in some other nations have reduced significantly in the past couple of years, Australians remain among the most indebted in the world.
Household debt is just above 1.5 times annual disposable income and has begun to climb back up after a brief pause when the global credit crunch prompted a short-lived spate of deleveraging. Debt-servicing ratios are significantly higher than they were in 2002 and 2003, when the last monetary policy tightening cycle took place.
Pleasant surprises in pay packets should not be expected for at least another 12 months, according to a survey of 287 organisations by Mercer. Its research shows the rate of growth in salaries had slowed from 4 per cent earlier in the year to 3.5 per cent in July and is expected to fall to 3 per cent over the next year. Nick Waterworth, of recruitment firm Ambition Group, said there had not been a dramatic pick-up in the white-collar job market.
"We are not yet back in a talent-short, salary-rising environment. There may be upward pressure on the market next year but that depends on what happens abroad as well as what's happening at home. If the United States consumer isn't back shopping, it won't help the job market," Mr Waterworth said.
The impact of this month's cash rate increase to 3.25 per cent was tempered by the fact that most households had used 12 months of historically low rates to get ahead in their mortgage repayments, but more increases are likely to erode this margin, thanks to the higher size of the average home loan.