TOUGH TIMES IN THE TWO-SPEED ECONOMY
Spending is weak and rate rises will add to woes
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.