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Despite an upbeat RBA consumer concerns continue to gnaw

Peter Warnes  |  05 Oct 2018Text size  Decrease  Increase  |  
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There appears to be increasing concern about the health and resilience of the consumer creeping into discussions on Australia’s economic outlook and GDP growth. Other issues exercising forecasters’ minds include the implications of escalating US/China trade tensions and the impact of the Hayne royal commission on credit growth, including the possibility of a credit crunch.

A credit crunch, in reaction to the financial services royal commission, could add further pressure to weakening house prices, at a time when the Reserve Bank (RBA) is unable to lower rates to stimulate demand. The official cash rate is already at a record low, although the cash rate has been increasingly ignored by banks, as the rising cost of offshore wholesale funds drives out-of-cycle margin-protecting mortgage rate increases.

In keeping the official cash rate at 1.50% at the 2 October board meeting, the RBA again singled out household consumption as a source of uncertainty. This was against a backdrop of solid economic growth, positive business conditions, increasing non-mining business investment, higher levels of public infrastructure investment and growth in resource exports. The central bank’s language is carefully chosen as to not create undue tension, but clearly households are furrowing brows at the top of Martin Place.

Financial aggregates statistics for the year ended (y/e) 31 August 2018, released on 28 September show a disturbing trend in credit growth. The rate of growth of total credit slowed from 5.4% y/e August 2017 to 4.5% y/e 2018, a slowing of 17%. Housing, the dominant source of total credit, slowed by 18% from 6.6% to 5.4%, business credit by 12% from 4.3% to 3.8% and personal credit by 29% from minus 1.0% to minus 1.4%. These are meaningful percentage declines and clearly reflect the tightening credit standards of banks following the repercussions from damming evidence at the royal commission. The supply of credit is being crimped.

A continuation this trend for an extended period, combined with sluggish household consumption could result in an economic contraction. The bond market is sending a similar signal. So far, the equity market is seemingly unperturbed. Morningstar’s senior banking analyst David Ellis expects housing credit growth to continue to decline to around 4%–4.5% through 2019, a further 21% fall from the y/e 31 August 2018 rate of 5.4%. He warns the rate could approach 2%–4% should house prices continue to fall.

While the RBA remains upbeat on economic growth after a 3.4% year-on-year GDP growth in the June quarter, and the outlook for the labour market remains positive, there are signs growth is likely to taper. Consumption—household and government—underpinned June quarter growth. Household consumption was supported by strong immigration and a falling savings rate—both are unsustainable. Government consumption was reflected in infrastructure spending, which is likely to continue, but probably at a slower pace.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 


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© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

is Morningstar's head of equities research.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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