Falling property prices and weak incomes have resulted in the Reserve Bank of Australia downgrading its consumption predictions while signalling a potential rate cut in the coming months.
The RBA this week kept the cash rate at its long-term record low of 1.5 per cent this week, saying the biggest risks to the economy are weaker consumption and reduced dwelling investment, which are both expected to remain soft in the coming quarter.
“The near-term outlook for consumption growth has been revised lower because weaker housing market conditions and income growth are likely to continue to drag on spending,” Governor Philip Lowe said in the RBA’s 78-page quarterly statement on monetary policy.
“Further out, though, the anticipated pick-up in income growth should provide some support.
“Although the pipeline of residential construction work underway should support activity in the near term, dwelling investment is still expected to decline significantly over the next couple of years.”
Household consumption, which is 60 per cent of the GDP, is expected to grow just 2 per cent this year, down from the 2.75 per cent previously predicted.
The RBA said that a recovery in income growth is likely given that employment growth is projected to remain solid, wages are expected to increase and the tax offset for low and middle-income Australians will come into effect later this year.
Falling house prices, which have dropped on average 7.2 per cent across the nation annually, were listed as a major concern, although the downturn is easing.
A frugal nation
Deloitte Partner Nicki Hutley says the flow-on effect from the housing downturn can already be seen in large-ticket items.
“In more recent years people were eating into their savings, but with the fall in property prices they’ve become warier and they don’t want to eat into their savings and that translates into lower household expenditure,” she told The New Daily.
“If you’ve had a decline in house prices, for people who bought 18 months ago, you’re feeling less wealthy, and you’re not buying fridges, holidays, or cars.
To slash or not to slash
The RBA said it would consider lowering interest rates if unemployment does not fall further.
“It concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target,” Mr Lowe added.
At this stage it’s impossible to tell if the bank will lower the cash rate in the coming months, Ms Hutley says.
“I would say in every meeting a decision to cut is always possible, but barring a really awful employment number they won’t move for a number of months,” she said.
“They’re looking for a sustained rise in the unemployment rate, we need to see that.”
A strong economy?
Treasurer Josh Frydenberg has insisted that the Australian economy is sound.
“The fundamentals of the Australian economy are very sound. And we have seen strong labour market growth,” he told reporters in Melbourne on Friday.
“It’s the RBA governor who says that wages are rising in every major sector in every state, faster than they were a year ago.
Overall the economy is “muddling through”, says Ms Hutley.
“A lot of it is in the hands of the global economy but in terms of how it’s doing, it’s muddling through, it’s not star material but it’s not doom and gloom.”
“The economy is incredibly resilient, 28 years of undisputed growth has demonstrated that. While wages aren’t growing as much as they should be, they’re still above inflation.
“The housing sector is slowing but there’s still a lot of spending on infrastructure, a solid mining sector and terms of trade are flowing in the right direction.”