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130423 Downunder Digest (1)

130423 Downunder Digest (1)

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Published by Belinda Winkelman

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Published by: Belinda Winkelman on Apr 23, 2013
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Global Research
It's all part of the central bank's game plan
Retail sales picked in January and February and consumer sentiment is around two-year highs. Is this the beginning of a consumer revival? It is certainly possible. It also seems to be part of the Reserve Bank’s game plan. To support growth, as the mining story slowsdown, the RBA has cut the cash rate back to its historical low of 3.00%. This is expectedto motivate a rebalancing of growth. As interest rates have their largest effect on housingand household spending, a pick-up in consumption is part of the plan.As we have noted recently, there are already signs that low rates are lifting housing pricesand construction, with more gains expected (‘
, 19 March 2013). On construction, Australia has been building too few houses inrecent years, so there is scope for a pick-up. After a period of falling housing prices in the18 months to May 2012, there is also some room for prices to increase, although excessive price growth would be a worry, given housing prices are already quite high.Low rates should also support consumer spending. While some argue that households will be constrained by high debt and saving rates, in our view, much of the household balancesheet repair may be behind us. Indeed, the sharp rise in saving occurred four years ago,with the household saving rate having been broadly steady since then, at around 10%. Thehousehold debt to income ratio has been steady for six years.Below neutral monetary policy should support a consumer revival. Low rates have boosted consumer cash flows, as around 90% of mortgages are on floating rates and RBAcuts have largely flowed through to effective rates. Low rates are also encouraging portfolio shifts from deposits to equities and housing, which is also boosting householdwealth. Rising household wealth encourages consumption and less saving.As the mining story slows down, we expect household spending to pick up, which shouldhelp support ‘
(7 December 2012). The rise in retailsales and consumer sentiment in recent months is consistent with a pick-up in householdconsumption in H1 2013, after a soft patch in H2 2012.
23 April 2013
Paul Bloxham
Chief EconomistHSBC Bank Australia Limited+612 9255 2635paulbloxham@hsbc.com.auView HSBC Global Research at:http://www.research.hsbc.comIssuer of report: HSBC Bank AustraliaLimited
Disclaimer &Disclosures
This report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it
MacroAustralian Economics
 Australia’s consumer revival
Retail sales and consumer sentiment have risen since theturn of the year, supported by low rates and rising wealth
Households have been rebuilding wealth via higher saving inrecent years, so consumer balance sheets have improved
After a number of years of apparent cautiousness, Australia’sconsumer sector may be ripe for a revival
2Downunder digestAustralian Economics23 April 2013
Retail supported by low rates, rising wealth and a steady AUD
Retail sales rose strongly in January and February, in line with a pick-up in consumer sentiment since the beginning of the year (Charts 1 and 2). The RBA reported in its recent board minutes that its own liaisonsuggests the improvement in retail conditions continued into March. The pick-up in spending is beingsupported by low interest rates, which have reduced households’ debt servicing burden, and risinghousehold wealth (Charts 3 and 4). After falling in the early part of last year, household wealth has pickedup, due to rising housing and equity prices.In addition to the effect of low rates, we also expect that the AUD is no longer putting as much downward pressure on local retail sales as it had been in 2010 and 2011. Back then, the strong AUD appreciationhad encouraged very strong growth in overseas departures of Australian residents, as more people choseto go on international holidays (Chart 5). This meant more dollars leaking offshore, as there was lessdomestic travel and more spending abroad. But growth in overseas departures has slowed. While it is stilla drag on local spending, the drag is easing. In this way, the AUD effect on growth is starting to wear off.
1. Retail sales have picked up solidly in early 2013 2. Consumer sentiment has lifted in recent months
Source: ABS Source: Roy Morgan; Datastream
3. Cuts to rates have reduced interest payment burden 4. Household wealth is rising after falling in 2011/12
Source: ABS Source: RBA; HSBC estimates
3Downunder digestAustralian Economics23 April 2013
This year, we expect retail sales to be supported by an upturn in housing construction, which alreadyappears to be underway (Chart 6). As more houses are built, we expect demand for consumer durables torise to fill these houses. While on-line sales have been a key source of competition for domestic retailersin recent years, durable goods are still largely purchased through traditional shop front retailers. Weexpect an upturn in sales of durable goods to support the local retail sector. Hence, our view remains that
(Downunder digest, 14 November 2012).
Household consumption and saving
Household consumption has not been a big part of the Australian growth story since the early-to-mid-2000s. Instead, the story has been about rising commodity prices and a very large mining investment boom. As mining investment has expanded, the consumption share of GDP has fallen and is currently atlow levels relative to history (Chart 7). It is also low compared with other developed world economies.Given the low level of the consumption share of the economy, there is scope for it to rise in coming years.An analogue of the fall in the consumption share of GDP is rising household saving. Australianhouseholds have lifted their saving rate from around zero in the early part of last decade to around 10% inrecent years. Importantly, though, it is the change the household saving rate that matters in terms of itsimpact on economic growth.
5. Spending dollars have flowed offshore, but this is slowing 6. Rise in housing construction to support durables sales
Source: ABS
7. Consumption share of the economy has been quite low 8. Bulk of saving rise may already be done
Source: ABS Source: ABS

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