Chief economist update: Not before we get a pay rise

Just in time for tomorrow's Reserve Bank of Australia (RBA) monthly board meeting, ME Bank published the results of the 14th survey of its "Household Financial Comfort Report", taken last June.

"The ME Household Financial Comfort Report provides in-depth and critical insights into the financial situation of Australians based on a survey of 1500 households ... produced bi-annually by ME with assistance from DBM Consultants and Economics & Beyond."

The report was quite extensive but in a nutshell, it found that: "With subdued and stagnant incomes, more Australians are feeling strapped for cash, and are being forced to dip into their savings to cover the rising cost of living expenses."

The Household Financial Comfort Index dipped to a reading of 5.44 out of 10 over the six months to June from 5.49 in the same period in December 2017 and 5.51 in June last year. The index averaged 5.45 out of 10 since ME started the survey in October 2011, hitting a low of 5.20 in October 2011 and a high of 5.78 in December 2014.

The survey's key findings:

Low income growth, "the majority of Australian households are not getting a pay rise." Not really an earth-shattering revelation but it confirms the stagnant growth in wages in the Australian Bureau of Statistics' (ABS) Wage Price Index (WPI) report and portends that the June quarter would not be much different from the 2.1% growth in the March quarter.

"...the latest HFCR data found nearly half of households (42%) still had the same income as a year ago, while a quarter (24%) reported income cuts and 34% received a raise."

Cost of necessities are a major concern as "over half of households reported it as their 'biggest financial worry'."  This is in line with findings from the Westpac/Melbourne Institute consumer sentiment index. While overall consumer sentiment picked up to 106.1 in July from 102.1 in the previous month, the survey revealed pressure on household budgets from "rising electricity and petrol costs, and declining house prices."

More dipping into savings as "fewer households are saving and those that are saving are saving less." I have discussed the reasons for this on this space on a number of occasions. Households are left with no choice given the erosion of their real wages (this has dropped to zero - wages growth of 2.1% (March quarter) and headline CPI inflation of 2.1% (June quarter)). Not only this, latest ABS data show that growth in household disposable income halved to 0.7% in the March quarter from 1.5% in the three-months to December 2017.

This has an ominous foreboding. As Consulting Economist for ME, Jeff Oughton warns: "Clearly, this is a potential tipping point. At the moment, Australians generally can dip into their savings to get by. However, some households may get to a point where there's no more savings to draw from. Currently, around a quarter of Australian households have less than $1000 in cash savings."

Housing stress is still widespread as "over half are paying more than 30% of their income towards housing each month - a common indicator of financial stress."  Here, the survey found that while financial stress among renters has eased over the past six months, 45% of households are expending more than 30% of their disposable income towards mortgage repayments.

Likewise, the percentage of households with mortgages "expecting they 'will not be able to meet their required minimum payments on their debt' and 'can just manage to make minimum payments on their debt' in the next 6 -12 months" increased to 43% from 38% in December 2017.

Wages is the key. The RBA won't be able to lift interest rates until growth in wages picks up lest it exacerbates the financial stress on households.

The RBA knows this, it has said so many, many times.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: AustraliansEconomicsABS - Australian Bureau of StatisticsME BankCPIJeff OughtonRBA - Reserve Bank of AustraliaWage Price IndexWestpac/Melbourne Institute
Link to something OBjjFEZq