Australia’s slowdown threatens 28-year record growth run

3

Australia’s economy is growing at its slowest pace in almost a decade as consumers cut back spending, raising concerns over how long the country can sustain its record run of almost 28 years without recession.

Figures published on Wednesday show household consumption – which makes up almost 60 per cent of the economy – dropped to 1.8 per cent in the year to March, down from 2 per cent three months earlier. The economy grew 1.8 per cent over the same period, down from 2.3 per cent – a very weak performance for a country with one of the developed world’s highest rates of population growth.

“Household spending is a big drag on growth and one of the fundamental reasons for it is very low wage growth,” said Sarah Hunter, economist at BIS Oxford Economics.

“Falling house prices are also having a ‘wealth effect’, whereby households are reluctant to spend on big-ticket items as the value of their main asset falls.”

New car sales fell 8 per cent in the first four months of 2019, when compared to the same period a year ago. Retail sales unexpectedly fell in April by 0.1 per cent. The household goods component of retail sales, which includes electronics and furniture, dropped 0.9 per cent.

The downturn is visible on the high street where many retailers are struggling. Two of the most recent victims are Focus on Furniture, a household goods retailer with almost 40 stores, and Transit Clothing, which collapsed last month blaming poor sales.

“Falling sales revenue for retailers does come back to consumer confidence, with falling property prices certainly having an impact,” said Daniel Woodhouse of FTI Consulting, which is overseeing the administration of Transit Clothing.

House prices in Sydney and Melbourne have slumped 12 per cent in the year to the end of May. This marks the end of a five-year expansion that saw prices in Sydney rise by 70 per cent and the household debt-to-income ratio increase to above 200 per cent – the fourth highest in the OECD. During this five-year period living standards have flatlined or gone backwards in terms of real disposable household income.

“I’d say we are already experiencing a mild income recession as GDP does not take into account population growth,” says Ben Phillips, associate professor at Australian National University.

The need to boost wages – growing at historically low levels of 2.3 per cent – and household disposable income to address stubbornly low inflation prompted the Reserve Bank of Australia to cut interest rates to a record low of 1.25 per cent this week. Philip Lowe, RBA governor, said further rate cuts were likely but insisted the outlook had not deteriorated and economic growth would pick up this year.

“It [the rate cut] will assist with faster progress on reducing unemployment and will help achieve more assured progress towards the inflation target. So that is our rationale,” said Mr Lowe.

But many economists are not convinced it will be enough to return the Australian economy to trend growth rates of 2.75 per cent.

“The economy is off to a rough start in 2019, and we suspect that things won’t get better anytime soon,” said Ben Udy, economist at Capital Economics.

He said households were saving any extra income they received rather than spending – a trend that saw the savings ratio edge up to 2.8 per cent in the first quarter.

The RBA, trade unions and many economists are calling on the newly elected conservative government to do more to stimulate the economy through fiscal policy. It is planning a modest income tax cut in July and a A$100bn ($70bn) pipeline of infrastructure projects, although these are staggered over at least a decade. But Scott Morrison, Australia’s prime minister, has pledged to return the budget to surplus in 2019-20, which could restrict the government’s ability to boost public spending further.

A deterioration in the global economy – potentially sparked by the US-China trade war – is probably the biggest risk to Australia’s record economic run. A prolonged slowdown in China, which is Australia’s biggest trading partner, could dent the domestic economy, which is already battling weak consumer spending and a housing downturn.

But until now Beijing’s efforts to stimulate its own economy through extra spending have benefited Australia by supporting record exports of Australian iron ore, coal and liquefied natural gas.

“This stimulus is providing Australia with a pay rise and helping the economy to perform better than some other peers,” says Chris Richardson, economist at Deloitte Access Economics.

But he warns the outlook is uncertain and the RBA decision to cut rates leaves it with less firepower to tackle any future crisis. “I’m a natural conservative and I think that the RBA interest rate cut would have had more impact in a crisis than using it now.”