The Australian economy, like the global economy to be fair, is muddling through. That is, despite significant increases in interest rates, higher cost of living and doing business, economic growth remains positive. Although GDP growth continues to moderate. A key part of the Australian economy is the consumer and below we discuss some indicators related to the consumer. A key indicator – Australian retail sales – is holding up much better than most investors would have forecasted in our view.
Australian retail sales in August were up +3.1% year-on-year, following +2.4% growth in July and +3.0% growth in June. On the back of materially higher mortgage rates – given in Australia most mortgages are on variable rates – investors had expected retail sales to suffer. However, Australian consumers have continued to spend and retail sales are largely tracking around their long-term growth rate of approx. 3.0%. Two indicators which could explain in large part why retail sales are holding up despite “cost-of-living” pressures is that most consumers generally want to spend. If they have a job and incomes are growing. On both these measures, Australian consumers are doing Ok.
The Australian unemployment is low, as seen in the chart below. Granted the Australian unemployment rate has ticked up recently to 4.13% as of September 2024. However, it remains low by historical standards. At the expense of stating the obvious, of course we are closely watching any material deterioration in the unemployment rate as an early warning sign of a potential recession on the horizon.
Australian consumers are also enjoying much better wage growth versus the past decade. Again, granted this is also reflecting a much higher inflation regime. Wages are growing around the 4% level, which should assist with the cost-of-living pressures and higher prices for key products/services.
We do hold some concerns over the Australian consumer as related to the household savings ratio, which has declined closer to 0% (0.6% as of June-24). Having no savings may highlight that consumers are maintaining their spending levels by eating into their savings which leaves little buffer in the event the unemployment rate materially increases.
Economic News
In Australia. The RBA kept the cash rate unchanged at 4.35% for a seventh straight meeting with Governor Michele Bullock signalling the bank will keep its key interest rate at a 12-year high in the near term as it struggles with stubborn inflation. Economic growth remained tepid in 2Q24 with GDP growth slowing to +1% y/y, the weakest pace of growth since 1991, outside of the early pandemic period. Consumer confidence dipped in September due to rising concern about the economic outlook and employment prospects with interest rates at a 12-year-high and expected to remain there for the remainder of the year. Home values rose in September though the rate of growth remained steady amid increased supply and mounting affordability concerns, with dwelling values in combined capitals rising +0.5% as Sydney advanced +0.2%, taking its median price to a fresh high of A$1.19m, Perth led major cities with a +1.6% gain, while Melbourne posted another decline.
In U.S. The Fed lowered its benchmark interest rate by -50bps to 4.75%, however, signalled it’s not in a rush to ease policy as they warned inflation “remains somewhat elevated” and job gains have slowed with downside risks to the labour market having increased, with officials raising their projection for the long-run rate by +10bps to 2.9%. Powell said he believes interest rates are unlikely to return to the ultra-low levels seen for many years before the pandemic. The economy bounced back from the pandemic in stronger shape than previously estimated with a +5.5% average inflation-adjusted increase in GDP from 2Q20 through 2023 vs a previously published +5.1% advance, equating to economy growing $294.2bn more in the five years ended in 2023 than previously reported, spurred mainly by bigger consumer-driven growth fuelled by robust incomes. Household wealth reached a fresh record in 2Q24, rising +1.7% q/q to $163.8 trillion, fuelled by a steady rise in the value of real estate with the value of real estate held by households climbing about $1.75 trillion, the most in a year, and Americans’ stock holdings which rose about $662bn. However, household liquidity, while still markedly robust, fell from a record in the prior quarter with deposits held by households and nonprofit organizations, which includes savings and checking accounts and money market funds, easing to $18.4 trillion.
In China. Factory activity continued to contract while the services sector slowed in September with manufacturing PMI being in contraction since April 2023, bar three months and non-manufacturing PMI falling to the lowest in 21 months, showing construction and services activity lost momentum and moved to the verge of shrinking. Residential slump deepened in September before the government released a basket of measures to put a floor under the yearslong property crisis, with the value of new-home sales from the 100 biggest real estate companies falling -37.7% y/y to 251.7bn yuan, faster than the -26.8% y/y decline in August. Broad budget expenditure shrank at a faster clip with the combined spending in the general public budget and the government fund account down -2.9% y/y in first 8-months of the year to 22.21 trillion yuan, amid an unprecedented drop in income earned by local governments from land sales, an alarming sign for an economy desperately in need of fiscal support.
In Europe. ECB lowered interest rates for the second time this year, reducing the key deposit rate by 25bps to 3.5%, with President Christine Lagarde warning the economic recovery is facing some headwinds and the risks remain tilted to the downside, as the bank lowered GDP forecasts for all 2024, 2025 and 2026 by -10bps to +0.8%, +1.3% and +1.5%, respectively while keeping the inflation outlook broadly unchanged, with Christine Lagarde announcing the bank is open to considering an interest-rate cut in October if the economy suffers a major setback. Euro-area momentum slowed in the 2Q24 with GDP rising +0.2% q/q, less than the +0.3% q/q growth initially reported, as trade and government spending supported growth while investment continued to be a drag. Euro-area inflation slowed below the ECB’s 2% target for the first time since 2021, with CPI rising +1.8% y/y in September, as energy costs fell sharply, leading to ECB President Christine Lagarde announcing the bank is becoming more optimistic about getting price pressures under control.
In UK. The BOE kept rates steady at 5% and warned it won’t rush to ease monetary policy while downgrading 3Q24 output growth by -10bps to 0.3% and year end inflation target by -30bps to 2.5%, with the bank announcing to continue to unwind its gilt portfolio at a pace of £100bn/year, giving Chancellor of the Exchequer Rachel Reeves about £3bn of extra headroom against her fiscal rules, so long as the OBR sticks to the assumption it has used since November 2023. Economy grew more slowly than thought in 2Q24, with GDP downgraded -10bps to +0.5%, with consumers remain cautious which saw saving ratio rise to 10%, the highest since 2021, despite real disposable income per head rising +1%.
