Spend­ing is weak and rate rises will add to woes

The Weekend Australian - - INQUIRER - ADAM CREIGHTON

It’s hard to log on to Twit­ter these days without catch­ing a pres­i­den­tial tweet laud­ing the US blue chip com­pa­nies’ record high share prices. “The Stock Mar­ket has been cre­at­ing tremen­dous ben­e­fits for our coun­try in the form of not only Record Set­ting Stock Prices, but present and fu­ture Jobs, Jobs, Jobs. Seven TRIL­LION dol­lars of value cre­ated since our big elec­tion win!” Don­ald Trump boasted re­cently.

In­deed, the Dow Jones In­dus­trial In­dex, which tracks the share prices of 30 large US firms, punched through 25,000 for the first time. And the econ­omy ap­pears to be mov­ing in sync. The Wash­ing­ton DC-based World Bank pen­cilled in 3.1 per cent global eco­nomic growth this year, the high­est since the cri­sis be­gan a decade ago. “For the first time since the global fi­nan­cial cri­sis, all ma­jor re­gions of the world are ex­pe­ri­enc­ing an uptick in eco­nomic growth,” the bank said this week.

Aus­tralia is ap­ing these trends: the bench­mark S&P/ASX200 has re­cently soared past 6100, its high­est level since 2008. The three great sta­tis­tics that mea­sure an econ­omy’s health look good here too: GDP growth is head­ing back to­wards its trend of about 3 per cent, the un­em­ploy­ment rate is fall­ing on the back of ex­traor­di­nar­ily strong jobs growth and in­fla­tion is at Goldilocks lev­els, just be­low 2 per cent. Shop­pers even ap­peared to cel­e­brate in Novem­ber, when sea­son­ally ad­justed re­tail spend­ing boomed 1.2 per cent, or triple what the dis­mal sci­en­tists had ex­pected.

But house­holds, the big­gest share of the econ­omy and the only one that votes, might be feel­ing less ex­u­ber­ant. The con­trast be­tween the typ­i­cal house­hold’s for­tunes and the broader econ­omy has per­haps never been greater. Aus­tralians have ex­pe­ri­enced the big­gest sus­tained fall in liv­ing stan­dards since the early 1990s re­ces­sion. House­hold in­comes, in- clud­ing wages, in­ter­est in­come and net rent, grew 1.8 per cent over the year to Septem­ber 2017, lower than dur­ing any 12-month pe­riod since 1991, ac­cord­ing to na­tional ac­counts data.

“The av­er­age worker is no bet­ter off now than they were a year ago, and we ex­pect real wages growth to be an anaemic 0.1 per cent in 2018,” says Sarah Hunter, head of Aus­tralian eco­nom­ics at BIS Ox­ford Eco­nom­ics. “And we es­ti­mate that to­tal dis­pos­able in­come, which takes into ac­count tax, grew just 1.6 per cent in 2017,” she adds.

It’s a trou­bling pic­ture, be­cause growth in to­tal dis­pos­able in­come is con­sid­ered the best way to mea­sure the strength of the real econ­omy, and on the lat­est fig­ures Aus­tralia is tech­ni­cally close to re­ces­sion.

Weak in­come growth pre­cip­i­tated the slow­est growth in house­hold spend­ing for a decade. Even the usu­ally re­strained Re­serve Bank board min­utes, the last set for 2017, pointed out that the out­look for spend­ing this year was a “sig­nif­i­cant risk given that house­hold in­comes were grow­ing slowly and debt lev­els were high”.

And spend­ing will al­most cer- tainly sag fur­ther if mort­gage in­ter­est rates start to rise, as many economists ex­pect. Mort­gage costs or rent ab­sorb al­most 40 per cent of the dis­pos­able in­come for a typ­i­cal worker earn­ing $70,000 a year, ac­cord­ing to exclusive anal­y­sis for The Week­end Aus­tralian by Pock­et­book, a Zipmoney com­pany.

Even for some­one earn­ing $140,000, the share spent on hous­ing is more than 30 per cent, which is a rule of thumb for hous­ing stress. The anal­y­sis is based on real ex­pen­di­ture data from about 15,000 in­di­vid­u­als.

A sep­a­rate re­port this week found more than 920,000 house­holds, about 10 per cent of the to­tal, were in mort­gage stress in De­cem­ber, ac­cord­ing to Dig­i­tal Fi­nance An­a­lyt­ics, up from 913,000 a month ear­lier. Those de­fined as be­ing in “se­vere stress” leapt from 3000 to 24,000.

And that’s even be­fore tak­ing into ac­count in­ter­est rates, which are set to rise. Of­fi­cial in­ter­est rates in the US in­creased three times last year even be­fore the Trump ad­min­is­tra­tion’s sig­nif­i­cant tax cuts took ef­fect on Jan­uary 1, and an­other two or three rate in­creases are ex­pected in 2018. It would be un­usual if Aus­tralian rates didn’t ul­ti­mately fol­low suit. In­deed, pric­ing in fi­nan­cial mar­kets sug­gests the chance of a 0.25 per­cent­age point rise by Septem­ber this year — which would likely be passed on to mort­gage rates — was at 60 per cent yes­ter­day.

Yet nei­ther weak in­come growth nor the prospect of higher in­ter­est rates has stopped house- holds tak­ing on more hous­ing debt. The ra­tio of house­hold debt to dis­pos­able in­come has in­creased to al­most 200 per cent, the high­est ever level in Aus­tralia and among the high­est in the world. The value of out­stand­ing mort­gages, the bulk of them sub­ject to vari­able in­ter­est rates, is now more than $1.71 tril­lion. At the same time the air has started to seep out of house prices in Syd­ney and Mel­bourne, which, if a har­bin­ger of a trend, could hob­ble con­fi­dence and spend­ing even fur­ther.

“It’s hard to see Aus­tralia do­ing aw­fully in the con­text of the global growth back­drop but we could un­der­per­form by more than ex­pected in terms of growth, and that could drag on the per­for­mance of the mar­ket,” UBS eq­uity strate­gist

‘The av­er­age worker is no bet­ter off now than they were a year ago’ SARAH HUNTER BIS OX­FORD ECO­NOM­ICS

David Cas­sidy said this week. “We’ve got an econ­omy that’s very hous­ing and con­sump­tion de­pen­dent, and a lot of the con­sump­tion is wrapped up in the hous­ing cy­cle. That’s one risk.”

Some com­men­ta­tors even ques­tion the strength of the job mar­ket. Roy Mor­gan, a mar­ket re­search firm, es­ti­mates 1.31 mil­lion Aus­tralians were un­em­ployed late last year, al­most dou­ble the of­fi­cial num­ber re­leased by the Aus­tralian Bureau of Sta­tis­tics.

That gives an “un­em­ploy­ment rate” of al­most 10 per cent.

“De­spite much ‘head-scratch­ing’ by eco­nomic fore­cast­ers that rely on the ABS un­em­ploy­ment fig­ures (5.4 per cent in Novem­ber) about why wages growth is near record low lev­els, our real un­em­ploy­ment and un­der­em­ploy­ment fig­ures show that nearly 20 per cent of the Aus­tralian work­force is ei­ther out of work or un­der­em­ployed and look­ing for more work,” says Michele Levine, chief ex­ec­u­tive at Roy Mor­gan.

“There have now been more than two mil­lion Aus­tralians ei­ther un­em­ployed or un­der­em­ployed for 27 straight months stretch­ing back to late 2015,” Levine adds.

The ABS counts peo­ple as un­em­ployed only if they have ac­tively ap­plied for a job in the pre­vi­ous four weeks.

How are house­holds re­spond­ing to this in­come re­ces­sion? More strait­ened cir­cum­stances have elicited a rev­o­lu­tion in how house­holds buy es­sen­tial ser­vices, from in­ter­net ac­cess and pet in­sur­ance to health cover and elec­tric­ity. While economists cel­e­brate the “green shoots”, or­di­nary house­holds are ex­plor­ing new ways to free up their dis­pos­able in­come. Ac­cord­ing to Pock­et­book anal­y­sis, the share of dis­pos­able in­come al­lo­cated to essen­tials such as hous­ing, gro­ceries, util­i­ties and rates is more than 55 per cent for an in­di­vid­ual earn­ing $70,000.

The top 19 com­par­i­son web­sites in Aus­tralia en­joyed 100 mil­lion unique hits last year, or enough for around 10 vis­its per house­hold. One of the larger sites, iS­elect, has en­joyed a 22 per cent jump in the num­ber of vis­i­tors since 2015.

“We’re like a mort­gage bro­ker but we op­er­ate across 12 dif­fer­ent prod­uct lines,” says Scott Wil­son, chief ex­ec­u­tive of iS­elect. “We are see­ing huge in­ter­est in get­ting a bet­ter deal on en­ergy ser­vices, es­pe­cially in Vic­to­ria, where elec­tric­ity prices shot up 15 per cent a few weeks ago, like they did in NSW last year.”.

The com­pany fa­cil­i­tated 449,000 choices of ser­vices, through which it earns com­mis­sions from the ul­ti­mate provider, in 2017, up 24 per cent from 2015. “The av­er­age age of our cus­tomers is about 42, but busi­ness from the over-50s has tripled in the last 12 months,” Wil­son says.

Health in­sur­ance and broad­band ser­vices have been the most pop­u­lar; iS­elect es­ti­mates Aus­tralians could save a fur­ther $5 bil­lion a year if they switched to util­i­ties that bet­ter served their needs. “We see 68-year-old cou­ples come in and they will still have preg­nancy cover, yet they won’t have heart cover or hip re­place­ment,” says Wil­son.

Com­plex­ity has also helped the growth of com­par­i­son sites. Mod­ern util­i­ties ben­e­fit as much from their “con­fu­sopoly” as their oli­gop­oly. Con­ven­tional wis­dom is that the more choice for cus­tomers the bet­ter, but the num­ber of hours of the day hasn’t ex­panded to pro­vide house­holds with the time nec­es­sary to com­pare highly com­pli­cated mo­bile phone or health in­sur­ance plans, or dif­fer­ent su­per­an­nu­a­tion funds.

And when or­di­nary house­holds suf­fer, so does the other linch­pin of the econ­omy — small busi­ness. James Pear­son, chief ex­ec­u­tive of the Aus­tralian Cham­ber of Com­merce and In­dus­try, says dig­i­tal dis­rup­tion is a “huge chal­lenge” for the coun­try’s smaller busi­nesses, which weren’t nec­es­sar­ily do­ing as well as the ma­jor busi­nesses that have been re­port­ing boom con­di­tions and record prof­its.

“They are very lean, and when they make de­ci­sions about re­sources and cut­ting costs, they don’t have as many op­tions as big­ger firms, and if they get it wrong they usu­ally fail,” he tells In­quirer.

“Big busi­nesses have a lit­tle more lee­way be­cause size does mat­ter. Small busi­ness own­ers don’t make much more than the av­er­age Aus­tralian, and when you look at their work­load they of­ten take home less than their em­ploy­ees,” he adds.

One of the coun­try’s most re­spected economists, Bob Gre­gory, a pro­fes­sor at the Aus­tralian Na­tional Univer­sity, says fig­ures that mea­sure av­er­age Aus­tralian house­hold in­comes and wealth are more mis­lead­ing than ever, due to the widen­ing gap be­tween the wealthy and work­ers.

“House­holds, typ­i­cally older, who own their home and have a lump (of money) in su­per have prob­a­bly had their best decade ever … They might have made $80,000 a year from cap­i­tal gains over a decade,” he says. “But for peo­ple whose in­comes are mainly wages, with lit­tle home eq­uity or shares, the story has been dra­mat­i­cally dif­fer­ent.”

In­deed, the num­ber of mil­lion­aires (in US dol­lars) in Aus­tralia is poised to jump from 1.16 mil­lion this year to 1.7 mil­lion by 2022, the big­gest per­cent­age jump among 23 coun­tries in­cluded in Credit Suisse’s lat­est global wealth re­port. And the lat­est Aus­tralian ve­hi­cle sales fig­ures, for 2017, re­flect an in­creas­ingly po­lar ex­pe­ri­ence. Lux­ury brands Rolls-Royce, Maserati, Bent­ley, As­ton Martin and Fer­rari en­joyed dou­ble-digit sales growth in 2017 while Holden, Ford and Hyundai sales fell about 4 per cent.

Even in Aus­tralia, where share own­er­ship is far greater than in the US be­cause of com­pul­sory su­per­an­nu­a­tion, re­bound­ing share prices of­fer lit­tle real im­prove­ment for most peo­ple.

The av­er­age su­per­an­nu­a­tion bal­ance for an Aus­tralian man in his late 40s is less than $150,000, ac­cord­ing to the lat­est sta­tis­tics

The link be­tween GDP growth or pro­duc­tiv­ity and the wages of or­di­nary work­ers has bro­ken down

from the As­so­ci­a­tion of Su­per­an­nu­a­tion Funds. A sim­i­larly aged woman has $87,000, and the me­dian across both sexes is a re­mark­ably low $64,000. A 10 per cent ap­pre­ci­a­tion of stocks — prob­a­bly the big­gest an­nual in­crease any ac­count holder could ex­pect in a year — makes lit­tle dif­fer­ence.

“What’s re­ally hap­pen­ing in the econ­omy is rel­a­tive prices among wages, shares and houses are mov­ing all over the place. Peo­ple’s judg­ments are go­ing askew,” says Gre­gory.

It’s not clear that a pick-up in GDP growth will do much to help the typ­i­cal house­hold. The link be­tween GDP growth or its close cousin pro­duc­tiv­ity — the set of fig­ures beloved of politi­cians — and the wages of or­di­nary work­ers has bro­ken down. Economists have tra­di­tion­ally stressed pro­duc­tiv­ity as the most im­por­tant in­gre­di­ent for im­prov­ing over­all liv­ing stan­dards.

“Since 1973 … pro­duc­tiv­ity has grown rel­a­tively slowly, av­er­age pay slower still, and me­dian and (non-man­age­rial) pay barely at all,” write economists Larry Sum­mers and Anna Stans­bury in a re­search pa­per re­leased by the US Na­tional Bureau of Eco­nomic Re­search last week. They point out that if the re­la­tion­ship be­tween me­dian and av­er­age wages had stayed the same the typ­i­cal US worker’s wage would now be 33 per cent higher.

Paul Dales, chief econ­o­mist at Cap­i­tal Eco­nom­ics, says the link is fray­ing in Aus­tralia too — wages have gone side­ways since 2010 while pro­duc­tiv­ity has con­tin­ued to climb — al­though not yet as much. “Per­haps work­ers in Aus­tralia en­joyed some of the fruits of the mining boom. Nonethe­less, the trend is still ev­i­dent, which sug­gests it is due to global forces that have put down­ward pres­sure on wages in most ad­vanced economies,” he says.

Amid all the talk of green shoots it’s al­ways worth ask­ing in whose gar­den they are grow­ing.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.