The feel good factor

The “feel good” factor in Australia’s household sector is looking a bit tattered

The feel good factor

Last week we pointed out that employment growth and the unemployment rate could play a significant role determining whether households feel confident enough to continue lifting their spending as strongly as they did through the second half of 2015. A stronger sense among the large majority of Australians in work that their jobs were comparatively secure was one factor that allowed households in aggregate to spend an increasing proportion of their disposable income and save a relatively smaller proportion. An increasing sense of job security was an important factor leading to households feeling good, but there is a question mark developing about job security early in 2016. This change in the sense of job security together with other developments including slower growth in household wealth and now a comparatively protracted period of pre-election uncertainty point to a significant risk that household spending growth will moderate in the first half of 2016.

Looking first at the changing sense of job security, news stories through the second half of 2015 relating to monthly labour force reports and surveys of job vacancies implied strongly improving availability of work and for most a greater sense that their jobs were comparatively safe. Of course there were exceptions notably in the mining and manufacturing sectors, but the number of jobs elsewhere grew very fast and more than compensated. Between June and December 2015 Employment rose very strongly, by 180,500 and the unemployment rate fell from 6.3% in July to 5.8% in December.

In contrast, the January and February labour force reports look quite weak. Employment has fallen by 7,200 over the first two months of 2016 and progress reducing the unemployment rate appears to have stalled. The unemployment rate was 5.8% in February, admittedly reversing the blip upwards to 6.0% in January, but essentially the same as in December 2015. Job vacancy surveys have also taken a softer turn early in 2016 implying that approaching employment numbers for March and April could be comparatively soft too. If this proves to be the case, even allowing for gyrations in labour force participation the unemployment rate is likely to be flat to possibly rising over the next two months.

Softer labour market likely to lead to less confident household spending…

The change from strong labour market conditions in the second half of 2015 to flat or softening labour market conditions in the early months of 2016 is likely to lead to less confident household spending in our view. It also needs to be kept in mind that growth in household disposable income is also likely to be noticeably weaker in Q1 2016 than it was in either Q4 or Q3 last year because growth in income is determined substantially by growth in the number of people employed and what they are paid. What they are paid in wages is likely to be growing just as slowly in Q1 as it was Q4 2015 and Q3, but there will be no boost from a substantial rise in the number of people employed as was the case in the second half of 2015. In short the pot from which households allocate money to spend or save will grow at a noticeably weaker pace in Q1 than in Q4 or Q3.

…with other factors also coming into play

How good households feel is also influenced by other factors and some of those are also turning softer. Household wealth grew particularly strongly in Q2 and Q3 2015 influenced by strong increases in house prices and the value of financial assets. House prices are no longer rising as fast as they were and increasing uncertainty has developed surrounding what house prices may do next. The investment housing market, in particular, is under increasing pressure from low rental yields, increasing vacancies, more stringent domestic lending rules, concern about oversupply of new multi-occupancy homes in Melbourne and parts of Sydney and uncertainty about the longer-term future of negative gearing tax rules. The double dissolution election threat also means that the normal period of pre-election uncertainty that can discourage some from making a big purchase – such as purchasing a house – is extended from a matter of weeks to a few months.

It’s not all bad for households…

Not all the factors influencing households have turned weaker. Petrol prices remain low, although not quite as low as they were. Also, unlike many Australian businesses, Australian households tend to feel better when the Australian dollar is appreciating because it tends to make imports and foreign holidays more affordable.

…however the feel good factor may not feel as good as H2’2015

On balance, taking account of softer labour market conditions, somewhat softer growth in household income, softer and less certain growth in household wealth, a lengthy federal election campaign ahead, but still low petrol prices and a stronger Australian dollar, the “feel good” factor in the household sector is looking a bit tattered compared to where it was through the second half of 2015. It is reasonable to expect that the change in how households are feeling will reflect in less robust spending on housing and consumer goods.

Can this developing change be arrested by timely official policy change? So far, the Reserve Bank seems to be looking backwards at the strength exhibited in the non-resources part of the Australian economy through the second half of 2015 and its economic forecasts look for this strength to continue in 2016. The RBA will probably need to see quite a lot of data pointing to a weaker turn in demand before it changes its economic view and responds with easier monetary policy.

Also there is now a quirky problem that may impact any RBA decision in the next couple of months. The Government has brought forward its budget release by a week to May 3rd, the same day as the RBA’s monetary policy meeting. The May RBA policy meeting was perhaps the first real chance for the RBA to deliver an interest rate cut and then explain fully the reasons for the cut in its quarterly Monetary Policy Statement due Friday May 5th. It seems less likely that the RBA would choose to change policy just hours before the Government brings down its budget. The risk that a necessary monetary policy easing is less timely than it should be seems high in the approaching calendar of budget and election events.

As for the government’s budget, even though it will precede an election it is being shaped with primary focus on medium-term fiscal responsibility with little to make households feel better about the near-term.

ENDS

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