“Perfect storm” pushing Aussie households into recession: Report
Tuesday, July 26, 2011/
Australian households are in recession, a new report claims, as a multitude of economic factors create the “perfect storm” to drive down consumer sentiment.
According to a new report by Perpetual Investments, there is “little doubt” the household sector is in recession despite the country’s economic prosperity and low unemployment rate.
Matthew Sherwood, the report’s author and head of investment markets research at Perpetual, says the root of the problem is record-low consumer spending.
“To an outsider, an economy of solid growth, with unemployment below 5% and annual labour income growth of 8.3%, retail spending growth three quarters below its 50-year average might seem massively inconsistent – but it is a reality,” he says.
According to Sherwood, the drivers of declining household spending include rising prices for petrol and utilities, and higher insurance premiums.
Interest rates also play a part, with Sherwood claiming rising rates have increased consumer caution and prompted an increase in the national savings rate.
“[Meanwhile], the desire of households to reduce discretionary spending, to undertake a deleveraging of household balance sheets, has reduced households’ propensity to consume as they collectively try to reverse a trend that has built up over several decades,” he says.
Sherwood says declining asset prices – namely housing and shares – are also to blame. This is in addition to the growing share of Generation X and Y as part of the Australian consumer base.
“These younger consumers are experiencing rising income and are increasingly buying things online… Baby boomers, who prefer to spend at shopping centres, are becoming a smaller part of the consumer base,” he says.
Finally, increased uncertainty about the economic outlook – namely in Europe, Japan and the United States – has weakened consumer confidence around the world, including Australia.
According to Sherwood, these factors have combined into the “perfect storm” to drive down consumer sentiment, which could continue to deteriorate.
“The spending strike that households appear to be on suggests that Australia’s economic foundations may not be as strong as the Reserve Bank believes, which has sparked calls for the RBA to cut official interest rates,” he says.
“Although such calls strike a chord with a struggling household sector, one has to ask under what scenario the RBA would cut rates, especially when inflation is on the rise and growth is set to strengthen in the year ahead.”
The findings are in stark contrast to an IBISWorld report, which claims Australians are “better off right now than we think”.
“Despite consumers still exhibiting slow spending, current wages growth is actually outpacing cost-of-living increases, with the consumer price index growing by an annualised 3%, compared to 3.6% for wages,” IBISWorld Australia general manager Karen Dobie says.
“Add to this the fact a range of consumer goods have decreased in cost, Australians are in many ways better off right now than we think.”