Every two years the Bureau of Statistics conducts a study on household incomes across Australia. The results are both fascinating and super-important for policymakers, raising questions about why the studies are not done more regularly. Certainly there is scope to harness the power of our increasingly electronic world to get more insights into major financial trends.
One of the major findings in the latest study is that the average real weekly household disposable income went backwards over the past two years. The drop wasn’t huge – with income down from $859 a week to $848 a week. But it was the first fall in 14 years, thus helping to explain why consumers have been paring back spending.
The evidence that we have had to date suggests that consumers weren’t being forced to reduce spending, rather it was more a case of choice. That is, consumers were worried about a host of factors such as the global economy and decided the safest route was to squirrel more savings away. But the household income survey suggests that – on average – people have less income available for consumption and saving, requiring them to be more conservative with their funds.
The survey shows that there were a greater proportion of people getting income from government pensions or allowances over the past two years with less people saying that their main source of income was a wage or salary.
Clearly economic circumstances will vary with each household income survey. In the two year period to June 2010, unemployment was modestly higher although wealth was near record levels. But it’s worth noting that both these factors haven’t changed greatly over the past year.
Another key result – and throwing further light on the spending/savings question is that a record proportion of Australians are now paying off a home loan. There has clearly been a major change over the past six to seven years. Back in 2002/03 more Australians owned their homes outright than those who rented or were paying off their home purchase. The way the current trends are going it is possible in the next five years that there will be more people renting than owning their home outright.
Clearly the fact that more people are paying off home loans further explains why people are more inclined to save rather than spend any extra cash they receive.
And a third key finding is that Australian households are indeed getting bigger for the first time since records were first compiled a century ago. If more people are occupying a dwelling, then there is less need to build new homes or apartments and thus goes some way in explaining while the home building market is failing to fire despite apparently tight rental markets across the country.
The first Tuesday in the month looms, and that means the Reserve Bank Board prepares to meet. And a new quarter has begun, thus signalling that a barrage of new economic data – the Spring Tsunami – is about to be unleashed. This barrage includes the June quarter economic growth figures to be issued on Wednesday.
But the week kicks off with the quarterly Business indicators publication from the Bureau of Statistics (ABS) on Monday. The publication includes new data on sales, profits and inventories. We expect that profits lifted by 2.5% in the quarter, boosted by the mining sector. The Performance of Services index is also out on Monday together with the monthly inflation gauge and ANZ job ads index.
On Tuesday the Reserve Bank Board meets. But home buyers don’t need to brace for bad news – the Reserve Bank Governor said that the current environment is a time for sitting and reflecting. On the same day the quarterly international accounts, housing finance and government finance figures are issued. Housing loans to owner-occupiers may have fallen by 1% in July but this fall pre-dates the recent drop in fixed loan rates.
On Wednesday the ABS releases the June quarter national accounts – a publication that contains the latest economic growth figures together with other indicators like savings and productivity estimates. We expect that the economy returned to growth in the June quarter after the floods and cyclone knocked around the growth estimates in the March quarter. Overall we are tipping growth of around 0.8% – only a partial rebound after the 1.2% contraction in the March quarter.
And on Thursday the August employment figures are released. Over the past eight months employment has only edged up on average by 5,000 a month while the jobless rate has tracked sideways. This soft trend probably continued in August with employment up by 12,000 and the jobless rate near 5 per cent.
In the US, a relatively quiet week is in prospect, kicking off with the Labor Day holiday on Monday. This holiday basically marks the end of summer holidays and hopefully signals the end of thin, speculation-driven trade on US and European sharemarkets.
On Tuesday the ISM services index is released. The index stood at 52.7 in July – above the 50 line that separates expansion from contraction. But economists tip an easing in the index to 51.3 in August.
On Wednesday the Federal Reserve releases its latest Beige Book. The book is a summary of economic conditions across Federal Reserve districts and in recent months the book has been living up to its dour title. But this month there may be more positive reports of retail conditions across the country.
On Thursday the closely-watched weekly data on jobless claims (new claims for unemployment benefits) is released together with the July international trade figures. The job market is grinding its way to recovery but the trade accounts are still mired in red ink to the tune of around US$52 billion.
The profit reporting season has come to a close and now investors and analysts are debating what happens next. And it could be that we are about to see a bout of merger and acquisition activity. While companies have released their accounts, they have also had a chance to look at what their rivals have done. And some company executives have probably been surprised about how much black ink has been printed on the annual and half-yearly accounts, especially when you consider all the anecdotal evidence of gloom and doom.
The simple fact is that Corporate Australia is in tremendous shape. Of the ASX 200 companies issuing full-year accounts, 85% reported profits and almost two-thirds actually lifted earnings from a year ago. Similarly, 85% of companies issued a dividend and 61% of these companies actually lifted dividends over the past year.
With organic growth hard to achieve, and with companies cashed up and with low debt levels, attention may now shift to merger and acquisition activity. While some companies will be cautious about embracing new opportunities in the current environment, others would conclude that there probably hasn’t been a better time to bolster their positions, especially with more attractive company valuations after the recent global gyrations.
Despite the strong position of Corporate Australia, we think the high Australian dollar will still make the going tough on the sharemarket over the next year or so. We expect the All Ordinaries to end 2011 around 4,650 points (ASX 200 4,600), lifting to 4,850 by June 2012 (ASX 200 4,825) and both the All Ordinaries and ASX 200 are expected to end 2012 around 5,000 points.
Interest rate expectations have bobbed and weaved in line with fluctuations in the sharemarket in recent weeks. And while the volatility seems to have eased for now, financial market participants still believe that rates are more likely to fall in Australia over coming months. In fact current pricing places the chance of an interest rate cut at the September meeting at 30%. And the overnight indexed swap (OIS) futures is factoring in lower rates with the yield in four months from now placed at 4.24% and the yield in a year’s time placed at 3.88%. On 90-day bank bill futures the implied yield in December is 4.24%.
Craig James is chief economist CommSec.
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