Weekly economic briefing: Solid consumer and government spending support growth

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Solid consumer and government spending support growth

Last week’s gross domestic product (GDP) data confirmed that Australia’s economic growth is currently running at a very healthy clip. The economy grew by a strong 0.9% in the June quarter, and by 3.4% compared to a year earlier – the fastest annual growth since the end of the mining investment boom in 2012.

A solid rise in consumer spending was the main contributor, adding 0.4 percentage points of the 0.9% GDP growth in the quarter (chart 1). But this came partly through lower savings, as Australia’s household savings ratio dropped to just 1.0%, its lowest level since December 2001.

Given falling house prices in many capital cities, it is unlikely (and undesirable) that households continue to run down their rate of saving to support further growth in spending. That, coupled with ongoing low wages growth, suggests consumer spending is unlikely to be such a driving force for economic growth over the next few quarters.

Chart 1: Percentage point contribution to GDP growth, quarterly and financial year
ABS 5206 – Australian National Accounts

Another contributor to growth in the quarter was government spending, up by a strong 1% (and contributing 0.2 percentage points). Government spending was buoyed by the continued rollout of the NDIS, as well as strong spending growth from state and territory governments. By contrast, government investment spending was low in the quarter, but is likely to be stronger going forward given the strong pipeline of spending in New South Wales and Victoria.

Private sector investment was a mixed bag. Mining investment was up a strong 5%, but non-mining business investment, on the other hand, dipped. The broader story for non-mining investment is brighter however. Investment growth over the past year has been strong, and a combination of strong profits, high capacity asset utilisation and elevated business conditions suggest further growth will continue over the coming year.

Overall, these GDP figures confirm that the economy expanded at an above-trend rate over the first half of 2018. But the data also points to risks to future consumer spending – low wage growth continues, and the household savings ratio cannot keep falling to support spending indefinitely.

For more information on the Australian brief, please contact co-authors David Rumbens and Harry Murphy Cruise.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Consumer debt, how worried should we be?

  • It would be hard to imagine life without mortgage and consumer credit.
  • Mortgages have extended home-ownership beyond the ranks of those on high incomes or with large amounts of capital. Credit has helped bring other major purchases, such as a new car or a kitchen, within the reach of most households. For the wider economy there are benefits too, since access to credit helps keep households going when incomes are under pressure.
  • Like most innovations, from the car to the computer, debt has also created problems. They have been all too clear in the wake of the financial crisis. From double-digit growth in car finance to student debt and ‘pay-day’ lending, consumer debt is a hot topic.
  • How worried should we be about levels of household debt?
  • The overall picture is less alarming than some of the headlines suggest. The bulk of household debt is not in the form of credit cards, overdrafts or pay day loans, but mortgages. Mortgages account for around 80% of the stock of debt. Since the financial crisis banks have become more wary and selective in lending and mortgage lending has been subdued. Since 2010 net mortgage lending has risen by an average of just 1.8% a year, compared with 10% a year growth in the decade before the financial crisis.
  • Unsecured credit, mainly credit card, car finance and overdrafts makes up the remaining 20% or so of total consumer debt. Growth here has been stronger, at 6.7% a year, although this is roughly half of the rate seen in the decade before the financial crisis. Car finance through personal credit plans has been the main driver of unsecured debt, with year-on-year increases of around 20% in the period 2014-16. Since then banks and regulators have tightened up on unsecured lending and growth in car finance has halved. Year-on-year growth in all unsecured lending, including cars and credit cards, fell to 8.5% in July, the slowest rate in almost three years.
  • Levels of household debt in the UK do not look extreme by international or by historical standards – though such comparisons are no guarantee of safety. The ratio of debt-to-income stands at 133% in the UK, down from 148% in 2007. While many countries, including the US and Germany, have lower debt levels; others, especially in the Anglosphere and Northern Europe, are more indebted. Household debt levels in Denmark, the Netherlands, Australia and Sweden are far higher than in the UK.
  • Measuring debt relative to incomes provides a partial picture of the ability of households to manage. To get a more rounded view we need to look at the asset side of consumers’ balance sheets and at debt servicing costs. On both fronts the news is fairly positive.
  • UK households have taken on more debt in recent years, but the value of their assets has risen much faster. Total UK household debt has risen by 19% since 2010 while the value of housing and financial assets, mainly shares, savings products and pensions, have increased by 44%. Meanwhile money is cheap and the average UK mortgage rate is less than half what it was ten years ago. Interest rates on personal loans have fallen too. However, borrowing through overdrafts and credit cards has become even more inadvisable, with interest rates on this type of debt higher than it was ten years ago.
  • The current state of household balance sheets has been shaped by monetary policy since the financial crisis. Quantitative Easing and low interest rates have collapsed the cost of money and pushed up the value of property, equities and bonds. The Bank of England set out to raise household wealth and reduce debt servicing costs, and it has succeeded.
  • Events could yet make manageable looking debt burdens unmanageable. A rapid rise in interest rates, and an unwinding of QE, would play havoc with consumers’ finances. This is why the Bank of England has emphasised that monetary tightening will proceed slowly and with great caution. It is possible to imagine shocks, such as soaring inflation, that might force the Bank to tighten policy more quickly. Or a demand shock, perhaps through a global slowdown or a chaotic Brexit, which would hit household finances and jobs.
  • These are risks but they are not, for now, the most likely outcome. For me the greater risk lies in who holds debt.
  • Most households with debt seem well placed to manage it. So, for instance, more than half of all unsecured debt, such as credit card borrowing, is held by households with above-average incomes.
  • There are also significant areas of vulnerability. The think tank the Institute of Fiscal Studies estimates that about 13% of UK households are under ‘immediate debt servicing pressure’ – defined as spending more than 25% of monthly after-tax income on servicing its debts or by being two or more months in arrears with a bill or credit agreement. The young and those on low incomes are most vulnerable. The IFS estimates that 25% of those in the bottom tenth of the income distribution are under debt-servicing pressure.
  • Younger and less skilled households are less likely to be working and do not have financial wealth to see them through difficult times. According to a National Audit Office report 22% of UK adults have less than £100 in savings.
  • A natural response to all of this might be to think that there is no level of household debt which is completely safe. But even if it were possible, trying to ‘bomb proof’ consumer finances by eliminating household debt wouldn’t work – consumers would be vulnerable to a host of other risks, from falling asset prices, unemployment and runaway inflation.
  • Like the free market or globalisation, society chooses to regulate and channel the provision of credit with the aim of maximising benefits and minimising risks. Policymakers must stay vigilant to the age old macroeconomic risks associated with consumer borrowing. Those risks are present but do not, for now, seem acute.
  • Debt problems today are concentrated in poorer households – and are part of a wider picture of low skills, low pay and less secure work. This is a set of challenges which extends way beyond the provision and regulation of consumer debt.

PS: Investors fled from emerging market (EM) assets last week amid global trade tensions and prospects of further US interest rate hikes. Over the summer, country specific issues such as structural weaknesses, poor policy or diplomatic row have led to full blown crises in Argentina, Venezuela and Turkey. This week’s moves seem to suggest a level of contagion with other EM currencies and assets also affected. EM equities officially entered a bear market, marking a 20 per cent decline from their peak in January. A number of EM currencies also descended to multiyear lows, with the Russian rouble and South African rand sliding to their lowest levels since 2016 and the Indian rupee hit a record low against the dollar.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 2% at 7,276, after hitting its lowest point in more than six months last week following a jump in sterling.

International economic briefing by Ian Stewart

Economics and business

  • European equities in the Stoxx 600 index dropped to a five-month low over concerns of knock-on effects from the sell-off in emerging market assets hitting EU exporters
  • Annual US wage growth hit a nine-year high of 2.9% in August
  • Japanese prime minister, Shinzo Abe, set out plans to raise Japan’s retirement age above 65 to address challenges arising from its ageing workforce
  • After two quarters of consecutive declines in activity, South Africa has fallen into its first recession since the financial crisis this year
  • Mark Carney is expected to extend his stay as governor of the Bank of England until 2020 to “support a smooth Brexit and an effective transition”
  • Vince Cable indicated he will step down as leader of the UK Liberal Democrat party, after struggling to revive the pro-EU party’s opinion poll ratings
  • The chairman of the Financial Conduct Authority (FCA), the UK’s financial regulator, said the accounting industry must improve its auditing of financial companies
  • The leaders of North and South Korea will hold a third summit in September in a bid to propel denuclearisation efforts on the peninsula
  • 11m British households will save an average of £75 a year on gas and electricity bills under a price cap proposed by the industry regulator Ofgem
  • The number of households opting for five-year fixed rate mortgages has overtaken those seeking two-year fixes in recent months, according to mortgage broker L&C mortgages

Brexit and European politics

  • UK prime minister, Theresa May, said the government was working to agree a Brexit deal by October, despite the Brexit secretary recently saying the target was unlikely to be met
  • Extracts from a leaked UK government Brexit contingency plan revealed the Treasury is worried about financial instability and has called for a strong communications strategy to “maintain confidence”
  • Phillip Hammond, the UK Chancellor of the Exchequer, said the UK would have to “refocus” its spending priorities in case of a no deal Brexit
  • The Guardian reports that Ireland is planning to agree a deal with the EU under which goods from the EU would be checked in France, sealed, and then travel to Ireland through the UK
  • Michel Barnier, the EU chief Brexit negotiator, said the UK government’s Chequers proposals were “dead in the water”
  • The Sunday Times reports that the EU is demanding that the UK selects an “off-the-shelf” model relationship akin to the EU-Canada deal
  • The Daily Telegraph reports that an emergency European Council summit dealing specifically with Brexit will be scheduled for 13 November
  • The FCA warned against fencing off EU financial activity post-Brexit and called for a deal which would allow mutual UK and EU access
  • Universities UK called on the government to reintroduce a visa scheme that would allow foreign students to remain and work in the UK for two years after graduation
  • Sweden’s nationalist anti-immigration party has made gains in the country’s general election as the establishment parties appear deadlocked, exit polls predict

And finally…

  • The Australian outpost of Madame Tussauds in Sydney said it is unlikely to ever create a sitting Australian prime minister waxwork again “due to high turnover” following the announcement of Malcolm Turnbull’s forced resignation – meltdown

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