A household spending slowdown is squeezing the economy

A household spending slowdown is squeezing the economy

By Callam Pickering

Based on strong population growth, housing investment should improve significantly over the next couple of years but those expecting construction to drive the Australian economy should probably temper their expectations.

If the Australian economy grows at around 2. 5-3 per cent over the next two years — optimistic in my view but consistent with the RBA’s current outlook — residential investment would need to rise by over 20 per cent for its share of GDP to rise by 0. 5 percentage points.

Household spending has slowed significantly over the past few months and, with declining real wages and budget cuts weighing on the household budget, I expect spending to be fairly soft over the remainder of the year.

Both Victoria and New South Wales have experienced particularly strong growth over the past year — potentially explaining some of the recent weakness — and have accounted for almost 80 per cent of total spending growth over that period.

With the trade balance deteriorating during the June quarter and household spending positioned to fall sharply, real GDP is set to contract for the first time since March 2011.

Housing construction will support the economy over the next couple of years but is unlikely to have a significant effect given its small share of real GDP.

That will be left to household spending and exports, the first of which has slowed significantly throughout 2014 and appears poorly placed over the second half of the year.

Households are looking to cut back on discretionary spending, with spending on household goods declining for the last three months.

From an activity standpoint, apartment projects typically take longer to complete and should support residential investment and the Australian economy over the next few years.

Spending in April and May is 0. 2 per cent below the March quarter average but we should remember that this reflects the value of activity rather than the volume of goods purchased.

Read more here: Business Spectator


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