Over the past seven years the Australian economy and the Australian stock market has underperformed relative to other developed countries, in particular the US. However, this appears to be changing with the Australian stock market outperforming over the past three months.
Taking a look into Australian disposable income levels can give you a better understanding as to what is potentially driving this change.
In a recent article, Morgans chief economist Michael Knox noted that growth in real household consumption has been relatively stable since 2013, despite slower growth in total household disposable income levels.
The low growth in household disposable income levels can be linked to a fall in Australia’s terms of trade between 2012 and 2016. Export prices fell relative to import prices because of the decline in Australian export commodity prices. This decline in commodity prices was also seen to generate much lower growth in nominal GDP. As a result, employment demand slowed, unemployment rose and wages growth weakened.
Interestingly, even though disposable income levels were weak in real terms between 2012 and early 2016, consumption continued to grow at a stable rate of between 2 per cent and 3pc. What allowed this to happen, was the decline in the savings rate. The savings ratio fell from 8pc to 4pc of total income levels over this time. In other words, households decided to save less of their income and spend more.
The main reason for this continued level of growth in consumption over this period, at the expense of savings rates, would appear to be linked to house prices which rose sharply, due to interest rates falling from 4.25pc to a record low 1.50pc.
However, since the start of 2016, Australian export prices have begun to recover steadily, resulting in an increase in employment levels and therefore overall income levels. It should be noted that wages are still yet to grow in any meaningful way.
In summary, Australia is now beginning a modest recovery from the very soft growth in household income levels that occurred between 2012 and 2016. This recovery in household income levels is a result of improved commodity prices, which should support a steady path of consumption growth over the medium-term.
While we don’t expect a return to the golden period for consumption experienced in the early 2000s, we do think that rising household income levels, will continue to support steady growth.
Furthermore we don’t expect a rise in the RBA’s cash rate until at least the second-half of 2020, which should also provide support for consumption growth over the medium-term, which is good for the Australian economy.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410