The week that was
While the budget dominated the mainstream news this week, it was the retail trade release that provided the most meaningful update on the economy. And the news was more of the same – a weak result for consumers, with zero growth in spending in the month of March and a paltry 0.2 per cent rise in spending in real terms in the March quarter.
The cautious consumer is still in place with spending constrained by weak wages, record household debt levels and a low saving rate. The fact that house prices are now falling in Sydney and Melbourne is likely to have a negative impact on wealth and spending, at least in the short term. As the RBA have noted, consumer demand is the main threat to the economy over the remainder of 2018 and into 2019.
In terms of the budget, the interesting take-away was the revision to the long term outlook for government debt. The torrent of tax revenue and an assumption of another decade of unbroken economic growth means Treasury is now projecting net government debt to fall to 3.8 per cent of GDP by 2028-29. If it happens, it will mean zero net debt is probably on track for the early 2030s.
My advice – don’t stay tuned for that one! A week is a long time in politics, a decade is forever.
The week ahead
Labour market issues will dominate the economic news with the quarterly wages and monthly labour force data both out.
Wages are a dominant issue for policy makers, especially the RBA which has for some time been hoping for some acceleration in wages growth to help meet its upbeat outlook for the economy. Higher wages growth will be important in boosting household incomes and spending and it is a vital requirement if inflation is to ever get back to the mid-point of the RBA target range. The current consensus is for annual wages growth to lift marginally to 2.2 per cent.
As the second chart (below) shows, employment growth has all but stalled in recent months after near boom conditions in 2017. This marked slowing in employment growth has coincided with a broadly flat unemployment rate and generally mixed news on the economy. If this is the start if a new trend – towards a weaker labour market – then hopes for a meaning boost in household spending, wages and inflation will quickly be dashed. The market is looking for employment to rebound by 25,000 but for the unemployment rate to remain unchanged at 5.5 per cent.