Australia: Household consumption unable to accelerate amidst low income growth – NAB

Analysts at NAB point out that Australia’s household consumption growth was muted in Q3 at 0.1% q/q, well down from 0.8% in Q2 to be 2.2% higher over the year in real terms (3.4% yoy nominal).

Key Quotes

“Consumption grew at a slower pace than disposable incomes (income at 0.5% q/q, compared to 0.2% q/q for nominal household consumption), causing the household savings ratio to rise for the first time in over a year, to 3.2% from 3% in Q2. Over the past year, there has been strong growth in insurance & financial services (+4.8% y/y), food (+4.3% yoy), communications (+4% y/y) and transport services (+3.2%). There are only very limited signs of strength in spending on discretionary items, with categories such as hotels, cafes & restaurants declining over the year (-1.7%). Health and communications spending also fell in the quarter, which are quite rare occurrences and could well bounce back next quarter.”

“In October, the value of retail sales increased 0.5% m/m and 1.8% y/y following four consecutive weak outcomes. This was above the 0.1% increase predicted by NAB’s Cashless Retail Sales Index, although the ABS measure declined in trend terms (0.1% m/m). The weakest industry is household goods, which is likely related to the slowing housing cycle. Food and cafes & restaurants remain the strongest. Meanwhile, NAB’s Online Retail Sales Index rose 1.5% in October, suggesting substitution between traditional and online retailers. (The growing share of online sales is not captured as fully in the official data, and the rise of online also appears to be changing seasonality, implying we interpret monthly movements cautiously).”

“Household consumption is forecast to grow by a modest 2.0% in 2018, before a small improvement to 2.4% in 2019 (real), unless we see a stronger pickup in wages and household income growth.”

“We have revised our inflation forecasts a little lower, as new CPI weights from Q4 show the weights for items with falling prices generally having increased in the consumption basket and vice versa. Other than that, our assessment of the inflation outlook hasn’t changed fundamentally. We expect headline inflation in Q4 to be boosted somewhat by higher utilities and fuel prices. For underlying inflation, it will be supported by the gradual tightening of the labour market, which is expected to slowly translate into higher wages growth.”

“On the other hand, low rent inflation due to increasing housing supply and increasing competitive pressure in the retail industry will keep underlying inflation subdued. The latest NAB Monthly Business Survey showed labour cost and retail price growth increased in November, while product price growth eased slightly. Overall underlying inflation is forecast to pick up to 2.0% by end-18, and 2.2% by end-19 y/y. This is a touch higher than the RBA’s forecast of underlying inflation rising to 2% by June 2019.”