Household spending is running out of growth sources
So far this year, consumer spending has contributed by far the largest part of GDP growth. And that’s not just because consumer spending accounts for the bulk of GDP. It has also grown in contrast to most other parts of GDP.
Underpinning this real spending growth – which, as we have noted, is not dependent on (declining) wages – is employment growth. In the last 12 months, Australia has added around 400,000 jobs to a workforce of just over 14 million. More than half of these jobs were full-time jobs (usually higher-paying jobs).
If we compare employment to where it was four quarters ago, we see that the gains are not in manufacturing or agriculture. Recently, hospitality (some of which may be part-time) and wholesale and retail jobs have increased. Construction jobs have also recently gained ground. Within other service sectors, unsurprisingly, healthcare, freelance and academic jobs have all risen steadily in the wake of the Covid-19 pandemic, although growth in these sectors is now slowly slowing. Employment growth in public administration is also now decelerating after rising in the previous three quarters, as is employment in finance.
In the three months since July, the number of people in employment has stagnated at just over 13.6 million. It looks like the spending spurt likely to come from job growth is slowing. And with wages negative in real terms, household spending will only continue to fuel economic growth in the coming quarters if households reduce savings (e.g. borrow more).
That doesn’t look like it’s going to happen on a large scale. Household balance sheets received a major boost during the pandemic, largely due to markets being boosted by monetary easing, which pushed up stock prices and the reserves held in retirement accounts. Liquid assets in the form of cash and deposits also increased.
However, household balance sheets peaked around the turn of the year and have been declining ever since. And while cash provides a solid buffer, the household saving rate has now fallen to 6.9%, well below the historical post-war average of 9.5%, so further declines are likely to be limited unless they are a response to crisis conditions. And if that’s the cause, then it probably won’t matter that much. Rising interest rates will also discourage discretionary non-saving.