If the Australian economy is to come through the challenges facing it from a protracted period of slow global economic growth, mostly falling commodity prices and the continuing severe downturn in mining investment spending, it is important that spending improves solidly in some substantial parts of the economy. Governments and businesses in Australia are unlikely to lift their spending substantially. Foreigners’ spending on Australian exports will lift, but the trickle down benefits to the rest of the Australian economy through improving investment and employment are limited. Increasingly, how well the Australian economy performs rests on household spending growth.
Spending by households on housing and consumer goods and services has been relatively strong in 2015 and early 2016 and has been the main reason why the Australian economy performed better than widely expected culminating in the Q1 2016 real annual GDP growth rate of 3.1% y-o-y. If that relatively strong annual growth rate is to continue, households must continue to lift their real spending at an annual pace around 3% y-o-y.
There are substantial impediments to households growing their spending at that pace. The first is that the household sector is carrying a record debt load, more than 160% of household disposable income and one of the biggest household debt burdens the world has ever seen. Low interest rates mean that servicing high household debt is not unduly onerous, but it could become so quickly if interest rates rise or the unemployment rate started to rise.
A second impediment, is that wages are growing unusually slowly, only 2.1% y-o-y in Q1 2016 and with little prospect of accelerating any time soon. Household disposable income is rising a little faster than wages assisted by rising employment, but signs are starting to show that employment growth is fading nationally and in some parts of the country employment has started to contract.
It is worth examining what has happened to employment growth, because it is likely to determine how strongly households spend and in turn total GDP growth.
Employment grew strongly through the second half of 2015. Total employment increased by 181,000 between June and December 2015, a 1.5% change annualising to a touch over 3% improvement. The composition of the employment change was very strong too, full-time positions up by 106,700 and part-time up 74,300.
Signs of a softer turn in employment started to show in December 2015 but have become pronounced in the first five months of 2016. Between December 2015 and May 2016, total employment has risen by only 35,000, a 0.3% increase annualising at a 0.7% increase. The composition of the employment gain so far this year has been soft too. Full time positions have fallen 60,700 while part-time has increased by 95,700.
Around the main six states there has also been marked differences in employment growth. The 101,600 employment lift in New South Wales in the second half of 2015 was 67.3% of the national employment gain in the period, while Victoria’s 36,000 employment gain was 19.9% of the national gain and Queensland’s 33,000 employment gain was 18.2% of the national gain. Even in the second half of 2015 when national employment growth was very strong, South Australia, Western Australia and Tasmania had no employment growth in total.
In the first five months of 2016 only New South Wales and Victoria are showing employment gains of any note, respectively +25,600 and +35,200. Employment has actually fallen in the first five months of this year in Queensland, -20,000; South Australia, -3,000; and Tasmania, -100. In Western Australia, employment has risen by only 3,700. On employment change, much of the country in geographical size is really starting to struggle and the headwinds to growth in household spending are becoming more pronounced.
It is New South Wales and Victoria that are carrying the hopes for strong growth in household spending but with noticeably less strength in employment growth now occurring in the biggest spending state economy, New South Wales.
Unless businesses and governments around Australia find good reason to start lifting employment more aggressively it is almost inevitable that growth in household spending will become less robust through the remainder of this year and that annual GDP growth will moderate too. Our view is that there is little reason to expect a strong resurgence in employment growth and as a result the case keeps building for more policy stimulus. It seems unlikely that stimulus will come from much stronger government spending/tax cuts and so the onus remains where it has been for some time on the RBA to lower its cash rate. We still see at least two more 25bps cash rate cuts this year, probably in August and November.