Finance Finance News RBA: Australia’s economic engine failing to hum
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RBA: Australia’s economic engine failing to hum

consumer spending
Household consumption is the engine room of the economy, and it's sputtering. Photo: Getty
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The Reserve Bank’s decision to hold the cash rate at 1.5 per cent has confirmed low wage growth and low inflation continue to plague the Australian economy through sluggish consumer spending.

“One continuing source of uncertainty is the outlook for household consumption,” the RBA said in its official statement on Melbourne Cup Day.

“Household incomes are growing slowly and debt levels are high.”

This is worrying because household consumption is the engine room of the Australian economy. Whether its clothes, food, nappies or Bluetooth speakers, the less people buy, the slower the engine turns over.

The RBA went on to warn that low inflation – a sign of sluggish spending – would persist for “some time”.

“Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing.”

The slump in consumer spending was reflected in the latest ANZ-Roy Morgan Consumer Confidence Index, which ended two weeks of rising optimism this week, falling to its lowest value in two months.

But the number of people who thought next year would be better rose 2.1 per cent, offsetting a fall of 4.5 per cent last week.

Callam Pickering, Indeed APAC economist, pointed to low wage growth as a wet blanket to any consumer spending or any chance of rate rise soon.

“Until wage growth begins to improve there is no urgency for the Reserve Bank to hike the cash rate,” he said.

“A rate hike in the current environment could very well be misguided given the current state of household spending.”

ANZ head of Australian economics David Plank said low rates and a stronger labour market were keeping consumer confidence broadly on track – but he warned consumers were less confident about the future.

“Broadly, they [households] have been able to weather the pressure on their wallets caused by the jump in energy prices, though not without some hit to retail sales,” Mr Plank said.

“But, given limited wage gains, slowing house price growth and an already low savings rate, consumers are increasingly less certain about the future, as reflected in the recent downtrend in future conditions.”

Last week’s retail figures revealed a grim landscape for Australian retailers in the lead-up to Christmas.

The Australian Bureau of Statistics revealed there had been zero growth in retail turnover in September – well below an expected increase of 0.4 per cent.

It was the third consecutive month of disappointing retail figures, following August’s shock 0.5 per cent plunge, and July’s 0.2 per cent drop.

But some economists say bad times for retailers may spell good times for consumers.

“Australian consumers are doing very well in the current environment as retailers are falling over themselves cutting prices,” Commonwealth Bank chief economist James Craig said.

“Retailers are the most challenged in the business community now, those who aren’t providing the experience people are looking for are paying the price.”

But he said low interest rates were the right thing for Australia right now.

“We need stability is what we need and stability is what we’ve got.”

It’s been a long road down to Tuesday’s 1.5 per cent cash rate. Rates have fallen every year since November 2011 during the heady days of a 4.5 per cent cash rate.

Any rate rise could spell catastrophe for business and consumers, Mr Craig said.

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