When thinking about Australia and the outlook for policy, I find it hard to get past the below chart. It compares the growth rate of household gross domestic income to household consumption expenditure (both nominal YoY). When the black line is above the red line, consumption is growing more quickly than income, so the savings rate is falling.
Right now the household saving ratio is ~2.5%, down from ~8.5% four years ago. So Australian households have been running the savings rate down by ~150bps per year for the past four years. Households have been on a savings diet — and who needed to save cash money anyway? It is hard, and boring, and if you owned a home then capital gains from housing did the hard stuff for you.
With house prices now falling ~1% per month, the capital gains alternative has come to an end. The savings rate can go negative, but it doesn’t go much below zero. So at a maximum there’s another year or two in this — but it is probably over, falling wealth (house prices) ought to make folks a bit more prudent.
There is a clear long run relationship: so you should not expect household consumption to run too far ahead of income growth over any period of time. The chart below shows the long run relationship between the two series (I use an annual average growth rate to smooth the two series, hence the small difference between the first and second charts).
Given the scale of this distressing gap, I think that the household income component of the upcoming GDP report is probably the most important thing to watch.
The RBA’s new table of forecasts tells us that they expect 0.5%y/y for Real Household disposable income (note that the above charts have been nominal). That requires 0.5%q/q. That may sound low, but as the prior three quarters have been basically flat, it’ll be the best quarter since Q4’17.