'Don't expect a consumer revival soon.'': Bank of America Merrill Lynch chief economist Saul Eslake says he expects consumer sentiment to stay low for some time yet. Photo: Rob Homer
Households are expected to come under further pressure this year, slashing spending as the unemployment rate rises and the federal budget eats into disposable incomes, a prominent economist says.
The forecast belt-tightening comes after a sharp dive in consumer confidence following the release of the Abbott government's first budget in May.
And Bank of America Merrill Lynch chief economist Saul Eslake said "don't expect a consumer revival soon".
Retailers have already began to feel the pressure, with a dozen announcing profits and sales downgrades in the past month after retail spending plummeted to a 10-month low.
''It is difficult to envisage a scenario in which consumer spending growth would recover strongly to an above-average growth rate,'' Mr Eslake said.
''The federal budget has taken away from household incomes and sapped sentiment and this has exacerbated an already challenging environment.''
Mr Eslake said he expected consumer spending to slow to be ''significantly below average'' this year with ''only a modest improvement in 2015".
Adding to frugality, the recovery in the housing market had delivered an acceleration in credit growth, catapulting the household debt-to-income ratio to 149 per cent.
The high debt levels made households more vulnerable and exposed to higher interest payments when rates ''do eventually, and inevitably, move higher'', he said.
''In an environment of elevated household leverage, a preference for debt management and savings will ... persist with consumers remaining prudent.''
The preference to save follows a cut in real wages, with wage growth slipping below the cost of goods and services in the 12 months to May.
Mr Eslake expects wage growth to remain weak, considering it had a ''negative correlation'' with the unemployment rate, and the head of the RBA's economic division, Christopher Kent, said last week that the number of people without jobs was likely to remain high well into 2015.
Mr Eslake said he expected the unemployment rate, which is at a decade high of 6 per cent, to rise to 6.5 per cent before the end of the year.
He said direct compensation to employees – which wages and employment growth combined – accounted for 72 per cent of household disposable income.
''It is reasonable to forecast that with unemployment rising, wages growth will remain soft. Indeed at 2.6 per cent year on year, wages growth is already historically weak and real wages are experiencing negative growth.
''So the news here is significantly less positive for consumer incomes and spending.''
Household income growth is forecast to remain ''subdued'' in coming years, at just below 4 per per cent compared with 6.9 per cent – the yearly average for the past decade, Mr Eslake said.
Although many people reacted negatively to the federal budget, Mr Eslake said the Abbott government's fiscal plan was a ''dose of reality'' to many households.
He said expenses must be reined in to achieve a sustainable surplus in the medium term.
''This means the largesse provided to households by previous governments, on both sides of politics, needs to be wound back.''
Mr Eslake said households were now feeling the pain of past governments mismanaging the mining boom, which brought the country riches and a sharp rise in average incomes during the past decade.
''Governments made the mistake of spending unexpectedly strong revenues ... from the mining boom on permanent household transfer programs and tax cuts, and in this way boosted incomes.
''But in doing so [they] did not realise or acknowledge that this boon from the mining boom would be transitory. That realisation has now taken hold and the government has outlined an intention to wind back transfer payments and raise taxes on high-income earners.''
Mr Eslake said this would cut about $3 billion – the equivalent of 1.1 per cent of retail sales – from households during 2014-15. That figure would rise to $6 billion over the following three years.
''These reductions are not too large in the scheme of household income, but is just one more factor adding to the many weighing on its growth.''