Growth driven by household expenditure
The Australian economy grew by 0.9% in the June quarter 2018, according to the ABS.
However, GDP growth per capita was only up by 0.5% over the quarter. GDP growth per capita is important because it is what drives increases to living standards.
“Growth in domestic demand accounts for over half the growth in GDP, and reflected strength in household expenditure,” ABS chief economist Bruce Hockman, said:
UNSW professor of economics, Richard Holden, found this concerning.
“We’ve been sustaining strong household expenditure [and thereby growth] by saving less, but that’s unlikely to continue,” he said.
The ABS found the household saving ratio in the June quarter 2018 declined to 1.0%, recording its lowest rate since December 2007.
“In an economy in which heavily indebted households face mortgage rate hikes from three of the big four banks (likely to be four soon) despite no official increase in interest rates, household spending will come under pressure,” Holden said in The Conversation, adding that it seemed brave to continue to predict robust growth.
In a separate report, the ABS found that labour underutilisation in Australia was at its lowest level since late 2013, at 13.6% in August 2018.
This was driven by a fall in the unemployment rates from 5.4% in July to 5.3% in August.
Trend employment increased by around 29,000 people in August 2018, with full-time employment increasing by around 21,000.
“For those people aged 15 to 64 years, trend participation was the highest on record. Female participation in this age group, at 73.2 per cent, was also a record high,” Hockman said.
RBA warns of household debt risks
High levels of risk exist across both bank and household balance sheets, as Australia has some of the highest levels of debt-to-income internationally, RBA assistant governor, financial system, Michele Bullock warned. Australia’s median debt-to-income ratio increased from 70% in the 1990s to around 190% today.
However, Bullock caveated the position saying there are several factors that suggest widespread financial stress among households is not imminent.
“This high level of household debt relative to income raises two potential vulnerabilities. First, because mortgage lending is such an important part of bank balance sheets in Australia, any difficulties in the residential mortgage market could translate to credit quality issues for banks,” she said at an Ai Group lunch in Albury.
The second vulnerability is that if there was an adverse shock to the economy, households could find themselves struggling to meet the repayments on these high levels of debt.
Bullock was also concerned that while the national picture of debt and households’ repayment abilities was not immediately concerning, the aggregate nature of the data could be obscuring rising vulnerabilities for certain types of households. However, she was confident that the economy growing at above trend and unemployment coming down meant that situation was not severe.