Right now there is a growing disconnect between how business and consumers view the economy. It is a gap that will continue to widen as measures of the economy suggest things are on the improve, but wages continue to grow at record low rates. And it is a gap which will have a significant impact on how voters judge the government’s economic achievements at the next election.
This month the NAB measure of business conditions hit its highest level since early 2008. In the same month the latest Westpac Melbourne Institute Index of Consumer Sentiment revealed that “the consumer mood remains downbeat with September marking the tenth consecutive month that pessimists have outnumbered optimists”.
For businesses, things are seemingly as good as they have been since the GFC hit, and yet consumers still feel little joy.
And this week came proof that this consumer sentiment was not just a “vibe” but was reflected in how they were spending their money.
The ABS revealed on Thursday that in August, Australians spent 0.6% less on retail goods and services than they had in July – the biggest one-month fall in spending since March 2013. And we can’t even argue it is just a one-off blip – the annual growth of retail spending is also the lowest it has been for four years.
Worst of all it is across the entire country.
Every state and territory saw retail spending fall in August. That doesn’t happen very often – the last time it did was in June 2009. And even if we take the view that this is all a statistical flub and we should use the more sober trend figures, things are not good. In August no state or territory saw retail trade grow by more than 0.15% in trend terms.
That has never happened before.
Everywhere you look, people are closing their wallets – and this at a time when full-time employment is growing stronger than it has for six years and the unemployment rate is as low as it has been since early 2013.
The collapse in spending was also across almost all areas – food, household goods, clothing and accessories, cafes, restaurants and takeaways all saw a drop in spending. The only good news was for department stores, but that was of little consequence given in the past year spending in department stores is down 1.4%.
The problem is that Australia’s economy is built not on the back of sheep or even from what we dig out of holes, but on household spending.
Household consumption makes up about 56% of our entire GDP, and over the past decade spending by households has accounted for a similar proportion of the growth of our economy. By contrast, in the past 10 years net exports have accounted for just 3% of the total growth of the economy.
When household spending slows down, so too does the entire the economy.
Fortunately, not all consumer spending is on retail trade – it makes up roughly a quarter of all spending by households – but it is a very good indicator of how households are spending. The problem is that much of the other household expenditure, such as on education, health, insurance, rent and utilities, is less driven by choice – you have to pay it.
It means if the prices of non-retail items go up, less household income is available to be spent on things you would buy down at the local shopping mall or supermarket.
The only way to keep pace is if household income also rises.
And that is where these terrible retail figures really hit home.
In the past year in Sydney, for example, the price of non-retail items has risen faster than that of retail goods. Childcare in Sydney rose 6%, electricity 10.5%, medical and hospital services 5.2%, transport fares 4.4%, and property rates and charges rose 3.1%.
At the same time the average wage of workers in NSW rose just 2.0%.
Something has to give, and what is giving at the moment is people’s capacity to spend at the shops.
Over time economies change, and what is important also changes. In the past we used to just look at the unemployment rate and pretty much assume that told the whole story. Now, with increased numbers of people working part-time, we know we need to look at other measures such as the underemployment rate, or hours worked.
Until the GFC hit the main issue with wages was whether they were growing too fast – whether Australia was becoming uncompetitive, or that the Reserve Bank would need to increase interest rates to calm things down. Most often the release of the quarterly wage figures were used as an excuse for conservative politicians and commentators to suggest the unions were out of control.
In the 10 years from 1999 to the end of 2008, private-sector wages grew on average by 3.6%. They have not grown at that pace for five years – and will not get close to that pace any time soon. The May budget predicted wages growth returning to that level only by June 2020 – and even that requires some pretty extraordinary things to occur.
Wages growth is now a key indicator of economic health. And while wages continue to grow at such low levels – currently below inflation – households will continue to act logically by spending less at the shops. It also means that other economic news, no matter how “good”, will continue to pale in significance – both economically and politically.
