AUD: Slowing consumer spending to weigh on GDP growth in 2017 - NAB

Research Team at NAB, suggests that consistent with still-soft wages growth and more gradual employment growth since late 2015, the pace in Australia’s consumer spending has remained subdued of late.

Key Quotes

“While the ABS retail trade data for August showed a stronger-than-expected 0.4% growth in retail turnover, driven largely by “department stores” and “cafes, restaurants and takeaway food”, retail sales growth was modest at 0.1% in trend terms. Other high frequency data such as our own NAB Online Retail Index and NAB Business Survey also paint a lacklustre picture of consumer spending in general. NAB’s monthly Online Retail Sales Index for August suggests that year-on-year and trend growth for online spending has softened further. In trend terms, retail conditions according to the NAB business survey eased to - 10 index point in September, the lowest level since late 2014.

While persistently soft wages growth and easing employment growth are expected to act as constraints, we continue to expect moderate (albeit easing) household consumption growth in coming quarters. A sustained low interest environment, to be supported further by the two additional 25bps cuts by the RBA which we forecast for next year, as well as the resilience in house price growth in major capital cities, should provide some positive impetus to consumption overall. We currently forecast real household consumption growth of 2.6% in 2016, before moderating to 2.1% in 2017 and 2.4% in 2018.

Soft wages growth and more gradual employment growth are also keeping inflation contained. We are expecting inflation to remain low for some time, given subdued growth in labour costs and very low cost pressures elsewhere in the world. Rental inflation has also remained around historical lows and has eased across most capital cities. With more dwelling supply to be added in the next two years, spare capacity will remain in the rental market, keeping rent inflation contained. For tradables inflation, domestic retail competition has kept the exchange rate pass-through at a slow pace.

The recent appreciation of the AUD will help relieve some imported inflationary pressure at least in the short term. Overall, we forecast inflation to remain depressed at below or just on 2% in 2017 and 2018, while headline inflation being a little higher due to tobacco excise increases and higher fuel prices.”