Households hold key to economic recovery
Everything you need to know about today's quarterly health check on the economy is reflected in the graph below. It's the money shot, so to speak.
We all know that the mining boom is delivering previously unimagined profits and activity for our mining sector. So the real surprise in today's numbers is the strength of the consumer comeback. As the graph above shows, the sharp increase in savings that began in late 2008 in response to the global financial crisis is fizzling out. Consumers are spending again.
This is important because, as Westpac's chief economist, Bill Evans, pointed out in a breakfast briefing at the Ivy Ballroom in Sydney this morning, mining only makes up about 5 per cent of economic output. Consumer spending on cars, clothes, and services etc makes up about 55 per cent of gross domestic product. All eyes are on the consumer.
Today's figures show consumer spending (or "household final consumption expenditure" as the statistician likes to call it) grew at a surprisingly strong clip in the June quarter - by 1.6 per cent. This was faster than growth in the broader economy of 1.2 per cent which is today's headline result. Growth in consumers spending rivalled growth in government spending, which increased by 1.8 per cent in the quarter.
But because consumer spending makes up a much bigger slice of economic output than government spending, its contribution to the final growth numbers are even more significant. Consumers contributed 0.9 percentage points to today's growth numbers, compared to the government's 0.3 percentage point contribution.
The significance is that, after the government carrying the economy for most of the past two years with its stimulus spending, consumers are finally getting back on board the growth train and opening their wallets. This is reflected clearly in the graph above for the household savings ratio.
Having driven down their savings for most of the late 1990s and early noughties, consumers had begun in the second half of the 2000s to improve their savings position. Healthy growth in incomes helped, as did a stabilisation in house prices, particularly in Sydney. Things began to deteriorate over 2007 as interest rates rose, taking an increasingly bigger bite out of household's ability to save.
But the onset of the most serious part of the global financial crisis in late 2008 saw Australian consumers increase their savings dramatically - assisted in no small part by cash handouts and freebies from the government. So yes, some of the stimulus was saved, but it has also brought forward the day at which consumers feel comfortable to spend again. It has helped consumers to build up a buffer in their repayments, helped, of course, by much lower interest rates.
So where to from here? What is clear is the Australian consumer is making a come back. Yesterday's retail sales figures show sales turnover is improving again. But will we ever return to the days of easy spending and easy debt that prevailed before the GFC? Today's numbers suggest consumers are becoming happier to spend again, but will it last?
Much of the debt fuelled increase in spending during the 2000s was due to banks being more willing to lend to consumers, but tighter credit conditions means this is no longer as true. And it would be sad to think we learned nothing from the GFC - it is likely that consumers will have learned some of the lessons of excessive debt and risk taking.
Finally, for a great historical perspective on today's growth numbers, here is a graph put together by NAB's Global Markets Research team. It shows how, after a downturn that was nowhere near as bad as the past two recessions, we're quickly bounding back to normality. Good times.
Note: interpreting the Bureau of Statistic's household net savings ratio is a bit tricky. It doesn't measure savings directly, but as a residual by deducting household spending from household net disposable income. It can be subject to substantial revisions over time, but looking at the trend is helpful. You can find out more about that in today's ABS release here.