Signs of weakness have emerged, with data showing the sharp decline in retail sales growth in the third quarter. Australians were happy to fund higher spending by putting away less savings as the value of their homes increases. When prices dropped however, as they have for 13 months, building a buffer traditionally took priority over shopping.
For Governor Philip Lowe, uncertainty about the consumption has been one of his constant regular warnings on the economy. It’s also a key reason why the Reserve Bank of Australia’s board is set to keep the cash rate unchanged at a record-low 1.5% Tuesday for a 25th meeting. The household debt being record level and overall stagnant incomes mean that there’s little scope to absorb higher borrowing costs.
“There will be a need for more deleveraging,” Joachim Fels, global economic adviser at Pacific Investment Management Co., stated in an interview in Hong Kong following a visit Down Under.
“If house prices continue to fall, which looks quite likely, you will probably see consumer spending slowing as well. Whether that is enough to push Australia into a recession is a different question. We are not forecasting a recession in Australia but a slowdown looks quite likely,” added Fels.
Underscoring the price weakness, nationwide auction clearance rates have held below 50% for the past five weeks, a sharp decline from the 72% they were when the year began. Last weekend, preliminary results came in at 47.4%, according to data from CoreLogic, the financial and property analysis company.
Retail sales rose just 0.2% last quarter, from 1% in the previous three months. A report two days earlier also showed inflation still subdued.
The RBA releases its quarterly updated forecasts on Friday. One major risk to the outlook cited in the previous Statement on Monetary Policy was spending– with the central bank noting that housing accounts for about 55% of total household assets.
“Lower housing prices could lead to lower consumption growth than is currently forecast,” it had stated in August.
“Although the earlier gains in national housing wealth may not have encouraged much additional consumption, it is possible that the consumption decisions of highly indebted and/or credit-constrained households could be more sensitive to declines in housing prices.” It was added.