Will consumer spending boost economic growth in 2018?

Consumer confidence was at a four-year high at the beginning of January, according to ANZ Roy Morgan figures.

What is the outlook for the Australian economy for 2018 when consumer confidence is up but household budgets are under pressure?

“Boring” with a side serving of moderate growth finished off with an interest rate rise or two. That’s the outlook for the Australian economy for 2018 as experts weigh up how yo-yoing consumer confidence, a tighter jobs market and falling house prices will impact the year ahead.

Alan Oster, chief economist for National Australia Bank, predicts GDP growth will be about 2.9 per cent in 2018. 

Growth in the services sector and billion-dollar investments in infrastructure will underpin the economy’s steady improvement.

“By global standards it’s still pretty good. And we think the global economy looks a lot better than it has for a while,” Oster says.

The outlook for consumer sentiment

One question hanging over the economy is “just what will consumers do this year?”.

“We still see that as one of the big issues going forward. How is the consumer going to behave?,” says Oster. “If the consumer doesn’t pick up strongly, that’s going to be a real drag on the economy.”

Despite the uplift in jobs – and falling unemployment, which some experts forecast will drop to about 5 per cent by year’s end – consumer confidence bottomed out in August 2017 at 95.5 according to the Westpac-Melbourne Institute’s monthly survey.

This result was dragged down by pressures on family finances, and concerns over deteriorating housing affordability and rising energy prices. 

Anything below 100 means more consumers are pessimistic than optimistic. 

This same confidence measure then surprised by rebounding to 103.3 in December.

Will stronger consumer confidence translate to higher spending?

While the stronger confidence is a positive, Oster warns the brighter outlook may not translate into consumers reaching for their wallets. 

“Consumer sentiment doesn’t necessarily line up that well with consumer spend,” he says. “Anything to do with the consumer is basically struggling. Wages are not growing. Gas prices have gone up 20 per cent. House prices are not as strong as they were, so you’re not getting the positive effects from that.”

Retail sales did surge 1.2 per cent in November, the biggest monthly rise in four years. Before anyone got too excited, the Australian Bureau of Statistics, which released the figures, was quick to point out this was driven by an anomaly – the iPhone X hitting retail stores. 

“Our electrical series went up 20 per cent in the month, which is where iPhones sit,” says Oster, who adds the so-called big sale day of Black Friday on November 23, 2017 may also have driven an unexpected increase in retail sales, creating a blip that statisticians are yet to iron out. 

The economy is “going to need consumption to pick up in a fundamental sense rather than ‘Hey, we’ve got a new iPhone’ ”, Oster says of the year ahead.

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Consumer confidence at a four-year high

CommSec senior economist Ryan Felsman is more bullish, celebrating the news that consumer confidence was at a four-year high at the beginning of January, according to ANZ Roy Morgan figures.

Whether that confidence retains its new buoyancy is “largely predicated on whether the employment market continues to increase,” says Felsman. He thinks “there’s no reason why it won’t.” 

“Employment growth is exceptionally strong at the moment, so we’ve had about 383,300 jobs created over the last 12 months, and the unemployment rate is at 5.4 per cent, a four-and-a-half-year low. And job ads are near six-year highs… so hiring intentions for employers are looking quite strong into 2018,” he says.

This has produced 13 consecutive months of job increases in Australia, the strongest in 12 years.  “The economy is picking up. GDP growth … in the latest read in the September quarter was 2.8 per cent, so it’s just below trend levels,” Felsman says.

Luxury car sales are down

Consumers appear to be tightening their belts in some areas. Luxury car sales are down, falling 1.8 per cent in the 12 months to the end of August 2017, a 15-month low. It was the biggest annual drop in five years, according to CommSec’s Luxury Vehicle Index, which tracks sales of 17 brands including Audi, BMW, Ferrari, Lexus, Mercedes-Benz and Rolls-Royce.

CommSec chief economist Craig James says the cooling demand could indicate further softening of the housing market and other parts of the economy. 

“In the past, when the top-end of the new vehicle market has peaked it has signalled slowdowns – not just in the car market, but also in other asset markets such as the housing market,” says James.

Falling house prices

It is widely hoped the blisteringly hot housing market will make a soft landing in 2018 as business investment and government infrastructure spending fill the breach. The CoreLogic Home Value Index found national dwelling values fell 0.3 per cent during December 2017. On an annual basis, dwelling values grew 4.2 per cent over the 2017 calendar year, below the 5.8 per cent growth during 2016 and far below the 9.2 per cent surge in 2015. 

Oster says the overall housing market is “not going fall off a cliff” in 2018. Some pockets, however, such as inner-city Brisbane and Melbourne apartments, might be harder hit due to overbuilding.

Interest rate outlook for 2018

On the interest rate front, the strengthening economy is expected to push the Reserve Bank of Australia board into tightening mode towards the end of 2018.

“We’ve got them going 25 [basis points] in August, 25 in November,” says Oster. “But it’s really data dependent. And it’s slow.” 

Felsman agrees it is likely there will be at least one rate rise by the end of the year.

“The Reserve Bank’s very mindful of the fact that households do have elevated debt, so they’re not going to increase interest rates quickly when they do start to lift rates, much like the rest of the world,” he says. 

Read next: Is Australia headed for an 1890s-style property crash


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