When will the period of “consumer conservatism” come to an end? That is the 64 thousand dollar question – a question that the official “family” (Reserve Bank and Federal Treasury) are openly asking themselves, together with analysts and investors. But unfortunately no one is any closer to answering the question.
Federal Treasury is tipping household consumption to grow by 3.25% in the next two years after lifting 3.0% this year and 2.1% last year. Currently annual growth in household spending stands at 2.8%. Over the past 50 years, household spending has grown on average by 3.6% a year. Even over the past decade, consumption has expanded by 3.4% a year. So below-average spending growth is set to continue.
While the slowdown in consumer spending clearly has implications for retailers and other consumer-focused companies, it also has implications for GST revenues.
Federal Treasury has noted “consumption steadily declined as a share of GDP over most of the 2000s. This is heavily influenced by increased household savings associated with the ‘cautious consumer’ and the consolidation of household balance sheets.”
But Treasury has also identified that “there has also been a steady decline in the expenditure on items attracting GST as a share of total consumption.” Treasury reckons part of this is cyclical – that households devote a greater share of income to GST-free goods and services in economic slowdowns.
But the other part of the puzzle relates to changes in relative prices. In volume terms, there was little change in spending on goods and services that were subject to GST and those that were GST-free. But there were differences in the prices of the two groups: “Prices of goods not subject to GST increased markedly over this period while prices of goods subject to GST rose only modestly.”
The price increases were most significant in areas such as rental services, health and education. Treasury noted that these goods and services wouldn’t have benefited from the strength of the Australian dollar.
Overall, though, there is bad news for the states and territories that receive GST revenues. In total, GST receipts have been revised down by $5.7 billion over the budget and forward estimates since November last year.
The Federal budget has come and gone for another year, and in the coming week we hear from the author of the report – Treasury Secretary Martin Parkinson. But there is a host of data to pore over together with minutes from the last Reserve Bank Board meeting.
On Monday new home loan figures are released. We expect that the number of home loans rose by 3% in the month while the value of loans posted a smaller 2% rise, reflecting softer home prices. At face value the data appears encouraging, but it probably reflects the vagaries of the timing of Easter holidays. In March, the number of loans slumped by 5.6%.
Also on Monday the Bureau of Statistics recasts industry data on car sales. In original terms, 74,214 cars were sold in April, down 8.8% on a year ago. After adjusting for seasonal effects, we expect that car sales fell by 1%, confirming that the new car market is trending sideways.
On Tuesday we have a triple whammy. Not only will the Reserve Bank release minutes of the last Board meeting, but Treasury Secretary Martin Parkinson also delivers the annual post-budget talk and lending finance figures are issued. It goes without saying that each event will be closely monitored.
On Wednesday another triple whammy – April imports data is released, together with the consumer sentiment index and the wage price index. Aussie consumers are expected to be nonplussed by the budget. It was hardly tough but there also weren’t any major handouts either. At the same time petrol prices remain high and some analysts are warning about imminent rate hikes.
The wage price index may prove more interesting. If wages lift 0.8-0.9% then you can forget about an imminent rate hike. But a lift in wages of 1.0-1.1% may prove more concerning for the Reserve Bank unless the gains are driven by just one or two sectors like mining.
And on Thursday detail labour market figures are issued alongside the average weekly wage results for the last quarter – providing wage figures in dollar terms.
In the US, the housing market is in the spotlight with data on new building (dwelling starts) due on Tuesday, with existing home sales figures issued on Thursday. Positive readings are expected for both indicators with housing starts tipped to rise by almost 4% and existing home sales expected to rise by 2%.
Of the other indicators, the Empire State manufacturing index is released on Monday together with March data on capital flows. On Tuesday, industrial production is tipped to have lifted by 0.6% in April after a 0.8% rise in March.
On Wednesday, minutes of the last Federal Reserve meeting will be released with the Philadelphia Fed index on Friday together with the leading indicators series. The leading index has lifted for nine straight months and a modest 0.2% increase is expected for April.
Sharemarket valuations ebb and flow over time. That is to be expected. Economic conditions change, causing changes to profits and profit expectations as well as changes to share prices. But one way of tracking changes over time is to take longer-term rolling averages. And what is clear from a 12-month rolling average of forward price-earnings ratios is that valuations have been steadily trending downwards for the past decade. Certainly valuations slumped then rebounded during the global financial crisis period over 2008 and 2009, but the downward trend has returned over the past six months.
Over the past 12 months the forward price-earnings ratio has averaged just 13.3. Apart from the GFC period, this represents the lowest PE ratio in 15 years. Is this the new “norm”? It may well be, reflecting the new age of consumer conservatism. And if that is the case, it is hard to argue that the sharemarket is cheap at current levels.
Each time the Reserve Bank Governor fronts the House of Representatives Economics Committee he is quizzed on the relationship between fiscal policy (movement in the Federal budget) and monetary policy (changes in interest rates).
At the meeting in November last year, Liberal member for Moncrieff, Steven Ciobo cited research by Chris Richardson from Deloitte Access Economics: “The rough rule of thumb in economic models is that you have to cut by about $13 billion a year to achieve maybe a 1% reduction in interest rates”.
When quizzed on the statement, Glenn Stevens said, “I suppose the point I would make is that a $13 billion change is about a % of GDP, and certainly changes in fiscal impact, particularly in one year – if it were spread over five years it would not be that big a deal – would be a tangible effect. If that came out of the blue, we would be recalibrating our thinking about what we do.”
Next financial year, the budget deficit is expected to more than halved, falling from near $50 billion to around $23 billion. Is that a big deal for the Reserve Bank? We may have to wait for an answer; the next speech by a Reserve Bank official – from Deputy Governor Ric Battellino – is not until May 26. And no speeches by the Reserve Bank Governor are currently scheduled.
Craig James is chief economist at CommSec.
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