Chief economist update: Weak household consumption now a sure thing

The race that stops the nation - the Melbourne Cup - is upon us.

There'll be a lotta betting and hopin' and wishin' and prayin' for a chosen steed to make it past the finish line in first place.

Cross Counter is the odds-on favourite to take the Cup followed by Mer De Glace and Master Of Reality.

Take your pick. My pick is for the Reserve Bank of Australia (RBA) to announce no change in interest rates before the running of the horses today.

The RBA would not want to disappoint market expectations for cutting rates on this day would only exacerbate concerns that something wicked this way comes.

But cut they will have to... again - sooner rather than later. Perhaps as soon as 22 days before Christmas when the board meets on December 3?

While the latest inflation figures were in line with market expectations, they remained below the RBA's target - headline ticked up by 1.7% in the year to the September quarter; trimmed mean steadied at 1.6%; weighted median decelerated to 1.2%.

Although the unemployment rate eased to 5.2% in September from 5.3% in the previous month, it has a long way to go to reach the 4.5%, the level which the RBA deems wages will start to pick up.

To be sure, wages growth has improved from a record low of 1.9% in the third quarter of 2016 but at 2.3% (June quarter 2019), it remains just a fraction of the 4% annual growth rate experienced during the mid-noughties.

Never mind that interest rates have been lowered and "employed" persons just got a tax rebate since July, the prospect of continued lacklustre growth in wages (along with concerns over the jobs and economic outlooks) are keeping consumers from spending.

This is underscored by the latest retail sales report that showed spending grew by 0.2% in the month of September - half the 0.4% recorded in the previous month and more than half market expectations for a 0.5% monthly gain.

More worrisome, the monthly growth trend in retail spending has been consistently weakening over the past many years.

But slow wages growth and the increased prospect of higher unemployment are prompting consumers to spend just on the necessities and utilities.

The RBA is correct to nominate household consumption as the biggest source of domestic uncertainty.

But given the recent weakening trend in household spending (despite lower interest rates and the government tax rebates), it's no longer an uncertainty but a sure thing ... and this take the Australian economy into a vicious cycle.

Putting this all together, weak wages growth and trepidation over the job market reduce consumers' propensity to borrow on credit and at the same time cut their spending.

Since one person's spending is another person's income, reduced consumer spending leads to less company revenues, lower profits, cutbacks in business investment on buildings & structures and equipment and staffing, that then becomes self-reinforcing that ultimately takes the general economy down.

Clearly, the RBA has to do more to encourage consumers and businesses to borrow and spend. But it's also clear that already record low interest rates have (so far) been impotent in boosting consumer and business confidence.

Other world central banks have been begging for fiscal support as has the RBA.

Australia's government has helped but only to the point that it doesn't endanger its claim (and myopic thinking) as the government that brought the budget back to surplus.

Beam us up higher, Scotty!

Read more: Reserve Bank of Australia
Link to something Nj6FV6Xv