Australians Spending Like 2007 Drive Fastest Growth in Six Years

(Bloomberg) -- Australian consumers fueled an economic expansion in the second quarter that beat forecasts to be the fastest in almost six years.

Households ran down their savings to the lowest level in almost 11 years to finance their spending, the statistics bureau said in Sydney Wednesday. That saw annual economic growth jump to 3.4 percent, half a percentage point higher than economists had predicted.

What’s draining those savings is key to where the economy heads from here: with households straining under record debt and stagnant wages, they may be tapping their bank accounts because that’s the only spare cash available. The alternative is that -- like in 2007 -- sentiment is strong and Australians feel they no longer need a post-2008 crisis savings buffer, particularly in an environment of record-low interest rates.

“At least some expenditure may be occurring at the expense of savings,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. Stronger household compensation “may well be assisting, but we note that on a per capita basis it remains weak,” she said, suggesting it’s being driven by increased employment and hours rather than wages.

Australians Spending Like 2007 Drive Fastest Growth in Six Years

Untangling all this will likely be crucial to gauging the sustainability of the economic expansion. Reserve Bank of Australia Governor Philip Lowe maintains the economy is “moving in the right direction”; yet he also acknowledges it will take time to tighten the labor market and push up inflation.

“As that progress is made, you could expect the next move in interest rates to be up, not down,” he told an audience in Perth Tuesday evening. “But any move still seems some way off, given the gradual nature of the progress expected on unemployment and inflation.”

What Our Economists Say...
“Highly-leveraged households and stagnant wages after inflation are other headwinds for domestic demand. The debt burden of Australia’s households (190 percent of income) is the highest since at least 1977 and has yet to peak. What’s more, the lion’s share of obligations is home loans, about 85 percent of which are financed with variable-rate mortgages. This suggests discretionary spending by households will be highly sensitive to the tightening of monetary policy without an increase in incomes to compensate.”

Tamara Mast Henderson -- Bloomberg Economics

For more, see our Australia Insight

Wednesday’s data showed household spending grew 0.7 percent in the three months through June, contributing almost half of the quarterly 0.9 percent gain in gross domestic product. This fits into the RBA’s narrative of solid spending helping drive above-average growth.

But the risks ahead are compelling: a weakening housing market that may hurt sentiment; mortgage-rate increases outside of RBA moves; a slowdown in China, Australia’s biggest trading partner, and the threat of a Washington-Beijing trade war. On top of that comes political uncertainty Down Under ahead of an election due next year.

“In the face of some of these risks, RBA policy makers should now be debating whether the pace of activity in the first half is likely to continue,” said RBC’s Ong. “We suspect not.”

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