A more resilient consumer and excess savings
The consumer looks in better shape than the RBA had feared, with spending revised up as households tap still-substantial excess savings.
The most important feature of yesterday’s national accounts was that consumer spending looks more resilient than first thought.
Originally, spending showed few signs of life, barely growing over the course of last year (although at the margin the ABS was classifying some government-subsidised spending as public expenditure).
Now, the ABS estimates spending grew by 1% over 2023, picking up to 1.3% in the year to Q1, similar to what prevailed immediately prior to the pandemic, but less than the 2½% average of the ten years prior to COVID.
The revision was driven by better data on household spending overseas, where the ABS started surveying Australians again on what they spent while travelling.
Although household income has passed its worst point, it has been weak over the past year and a half after returning to a more normal level following a surge during the pandemic on massive government handouts, which begs the question of how consumers funded this extra spending.
The answer lies in the household balance sheet, with the household saving rate revised lower and our estimate of household net cash flow – which equals saving less investment in physical assets, mainly housing – turning flat to slightly negative since late 2022.
Household net cash flow, or “net lending”, equals the net acquisition of financial assets by households less their net incurrence of financial liabilities, so for it to turn slightly negative means that households are not only tapping the excess savings accumulated during the pandemic – which were the product of government handouts and saving by households during lockdowns – by saving at a slower rate than the pre-pandemic trend, they have reduced their net financial wealth slightly by selling some financial assets and/or increasing their debt.
(A negative cash flow for households is not unprecedented – it was common for households during the 1990s and 2000s, when Australian households rapidly geared up and/or sold some of their financial assets.)
This raises the question of why households would save at a slower rate and likely slightly ran down their net financial assets recently.
Comparing Australia with other countries, it looks like households are following the lead of the US and euro area by running down their more substantial excess savings, which peaked at about 13% of GDP and where our preliminary estimate for Q1 is 8% of GDP.
In this way, the excess savings are smoothing spending during the recent period of extreme COVID-driven volatility in income and wealth, supporting expenditure until income recovers.
That strategy seems to have worked for most households in that income should soon be boosted by July’s income tax cuts and with total household wealth growing strongly on capital gains from a sharp recovery in house prices.
For the RBA, the revision to spending challenges its main downside risk to the outlook, which was that a stressed consumer would place downward pressure on inflation.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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