Australian Consumers in Retreat as Budgets Strain - Update

By James Glynn Features Dow Jones Newswires

Australian consumers are in retreat, with retail sales flat in July, a sign of growing stress on wallets as wages stagnate and utility costs soar.

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Economists warn that pressure on household budgets could slow the economy sharply, amid reports some consumers are having to choose between paying for basic items, or meeting rising energy bills.

It's the darker side of the Australian economy, which otherwise reported solid economic growth in the second quarter as activity rebounded after a cyclone in March.

The strain on household budgets has intensified threatening to snuff out spending through the approaching Christmas period, a looming disaster for retailers, according to economists.

At the heart of the problem is record household debt, among the highest in the world, combined with years of flat to falling wages. To plug the gap in budgets, consumers have run down savings to their lowest levels since the global financial crisis.

The economic dynamic is worrying the Reserve Bank of Australia, which understands the problem could persist for some time yet, especially if benign global wage trends are any guide. The pressure on households will ensure the RBA keeps interest rates low, resisting the shift among its counterparts to tighter policy settings.

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When the RBA does raise rates, the process will likely be labored as households are now more sensitive to rising mortgage costs. It would also drive the Australian dollar higher, likely putting downward pressure on wages.

Still, RBA Governor Philip Lowe remained optimistic in a speech this week saying he believed the laws of supply and demand in labor markets worked, and wages would rise.

"I am optimistic enough that I don't see it [low wage growth] as a permanent state of affairs. It is likely that, as our economy strengthens and the demand for labor picks up, growth in wages will pick up too," Mr. Lowe said.

Paul Dales, chief economist at Capital Economics said, "It shouldn't be a surprise that households kept their wallets in their pockets in July after data released yesterday showed that their real incomes have risen by a paltry 0.6% over the past year".

Mr. Dales expects pain for consumers to intensify as their next utilities bills will include 10-20% electricity and gas price hikes implemented in July.

The July retail sales report also showed a big contraction in discretionary spending.

Sales at department stores have weakened in four of the last five months, with the decline steadily gaining momentum over that period. Household goods sales were also lower in July.

Su-Lin Ong, head of economic research at RBC Capital Markets, said there was a resurgence in consumer spending earlier in the year when the economy steadied after the cyclone that brought the eastern seaboard to a near standstill.

That bump up helped growth in the second quarter. But things have now returned to the subdued pace at the start of the year, she said. The hit from climbing utility costs midyear will ensure consumers remain in their shells.

A ray of hope for households is the job market, which has shown strength in recent months, with full-time jobs growing strongly.

David De Garis, senior economist at National Australia Bank, said solid employment growth has eased his fears around the outlook for consumer demand.

But he added that the amount of public attention being heaped on the issue of rising electricity and gas prices, which has become highly politicized, will be enough to ensure consumers stay cautious.

-Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

September 07, 2017 02:05 ET (06:05 GMT)