Australia / Spotlight Reports
July Economic Update: Australian Households To Struggle Over
by Tom Youl
Jul 19 2019

According to the Reserve Bank of Australia, Australian economic growth is projected to pick up slightly over 2019-20 (GDP growth of 2.50%, up from 2.25% in 2018-19). However, households are projected to see little benefit. Household consumption is the primary driver of GDP growth, accounting for 55.8% of the Australian economy. However, this ratio has been in sharp decline since 2016 (when it was 58.9%), coinciding with a stagnation in real wage growth. Although Australian GDP has been growing, corporate profit’s share of GDP has been rising strongly, along with modest rises in government expenditure. In other words, the majority of Australia’s economic growth over the past five years has been on the back of corporate income statements rather than employee payslips. This trend is projected to continue over 2019-20, limiting household consumption and economic growth.

Real non-farm productivity has reported only modest gains over the past five years, partially explaining sluggish wage growth over the same period. Productivity growth is a key driver of increasing wages. According to the Australian Treasury, from 2001-02 to 2013-14, the top 10% of productive businesses had annual real wage growth of 2.8% compared with 1.7% at other firms. Unfortunately, there is insufficient government investment planned to stimulate productivity growth over the coming year. Additional infrastructure expenditure would have been particularly beneficial in this regard, with the added benefit of addressing the excess labour capacity currently dragging on economic growth. Most existing projects are planned on roads, which deliver inferior long-term economic benefits and productivity growth compared with rail. In addition, chasing a budget surplus in a time where fiscal stimulus is needed will likely impinge on the Australian economy in 2019-20. The private sector has also been underwhelming in its efforts to increase productivity. In particular, Australia has lagged behind other developed nations in high-tech capital investment.

Consumers will likely be somewhat buoyed by the recently introduced tax cuts over 2019-20. The aim is to stimulate household expenditure and kickstart the domestic economy. However, poor wages growth over the past five years has forced many households to reduce savings to make ends meet. Consequently, many households will use the rise in net income to bolster savings, particularly if pessimism reigns throughout the coming year. In many ways, consumer sentiment will be reliant on residential house prices. A rise in house prices tends to make consumers more confident regarding their future wealth, which in turn stimulates expenditure. Residential housing prices are projected to increase over 2019-20, providing a positive influence on consumer confidence. However, this confidence-boosting trend could be more than offset by the effect of interest rate cuts. After the June and July 2019 interest rate cut, consumer sentiment fell sharply. Many Australians took the successive rate cuts as a sign that the economy is struggling. Overall, consumer confidence is forecast to fall and become negative in 2019-20, constraining consumer expenditure and economic growth.