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Weak Consumers Still A Worry For Investors

There’s a timely warning for investors, especially those interest in retail, from the March National Accounts and GDP figures - its a simple one - tougher times lie ahead, as consumers feel the continuing of a weakened outlook and finances.

Despite the best terms of trade in a year, solid jobs growth, a solid rise in national income, moderate inflation, good exports, rising private non-mining investment and high company profits, consumers have missed out and that showed up in weak household spending, a development made worse by a lack of wage growth.

This is the central concern for the Reserve Bank and is why interest rates will not rise any time soon - household finances are just too fragile, and besides inflation is not a problem.

An added problem for consumers is the rise in petrol prices which will see public transport costs rise in coming months, especially for buses.

The question for retailers (in the broadest sense) if whether this going to impact retail sales in coming months after a small upturn at the start of the year.

One factor to watch is the slide in the savings ratio - a measure of how much money Australians are putting aside (much of it has been in prepayment of housing loans but that is now falling as interest only loans convert to the standard variable loan and use up some of the advanced payments).

The National Accounts show that the now infamous ‘income recession’ that some media and others were flogging a year or so ago has now gone, vanquished by a 3.3% rise in the terms of trade (the strongest for a year) and a 1.9% rise in real net national disposable income in the quarter (and up 2.5% in the year to March).

Company profits were the highest for a year with mining the driver (LNG, coal, iron ore and gold - but not retailers).

But no ‘income boom’ because wages are going nowhere - the broadest measure of wages from the national accounts was well under inflation and growth in national income in the quarter and the 12 months.

In fact the way the National Accounts treats wages - describing them as Compensation Of Employees (COE)- is misleading. COE rose 0.8% in the quarter and 5.1% in the year to March. Compensation Of Employees (which measures total compensation for people employed in all sectors - it is a crude aggregate).

That 5.1% was the strongest growth since 2012, but so has the growth in the labour market which was 3.1% in the year to March. The real story is what is called AENA wage growth (or Average Earnings from the National Accounts).

The Wage Price Index series from the ABS showed an unchanged 2.1% growth rate in the year to March. The ABS AENA said that was 1.6% in the four quarters to March. That means the broader National Accounts Measure must have picked up industries where wages fell in the quarter and the year.

Given real net national disposable income was up 2.5% in the year to March, quite a few workers (and consumers) are missing out. Not even the 3% minimum wage rise last year has had a significant impact.

The 0.3% rise in house hold consumption was sharply lower than the 1.0% rise in the December quarter (which contributed 0.6 of a percentage point to December quarter growth and was the largest contributor. That fell to a 0.2 contribution in the March quarter). The annual rate of 2.9% in the three months to March was unchanged from December.

The AMP’s Chief Economist Dr Shane Oliver wrote in a note on Tuesday "The weakness in consumers is well known – real wages growth is running flat, the savings ratio is now very low at just 2.1% and debt levels are very high. It is difficult to see households gaining confidence to run down their savings rate further in the current environment of low wages growth, slowing wealth accumulation (as home price growth weakens) and high debt levels.”

"Proposed income tax cuts from the government are not large enough to change this outlook. Its worth noting that while the National Accounts reports “compensation of employees” as being up a strong 5.1% over the last year, this mainly reflects the strong employment growth of the last year as “average compensation per employee” is up just 1.6% over the last year consistent with other measures of low wages growth.

And commentary from the National Australia Bank was similar on household consumption:

"While the quarterly outcome was weaker than we expected, it is more in line with our assessment of the underlying rate of growth in household spending. The significant headwinds faced by the household sector - weak wage growth, cooling house prices and high debt levels – continue, and are likely to weigh on consumption in 2018.”

So what’s this mean for retailers? When annual trend growth in retail sales jumped from 2.3% in January to 2.7% in February, there was confidence that that the sluggish 2.0% growth seen in 2017 had been broken. but the growth rate has since fallen back to 2.6% and remained there and the danger is that consumers, faced with little wage growth, rising debt and the prospect in the next year to 18 months of higher interest rates, are starting to curtail spending, especially in department stores and for big ticket items.

Monthly car sales fell 2.1% in May from a year ago and came after a dip of 0.2% in April. Car are still up 2.1% for the first four months of the year, but that rate has halved from the 4.4% growth seen in the March quarter.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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