Australia | Oct 12 2007
By Chris Shaw
Yesterday’s 33-year record low outcome for unemployment was evidence the Australian economy remains strong and today ANZ Bank has provided more supporting evidence by pointing out retail trade in Australia is currently growing at its fastest rate since 2004.
On the bank’s numbers growth in retail trade for the year to August was 7.8%, meaning it has actually accelerated over the first couple of months of 2007/08. According to the bank’s head of Australian economics Tony Pearson the reason for the increase is simple – Australians are enjoying higher household disposable incomes.
This trend is expected to continue as Pearson notes the tight labour market should support ongoing wage growth of around 4%, while disposable incomes will be given a further boost when additional cuts to income tax come into effect from July next year. He also sees scope for further cuts to income tax to be announced in the coming election campaign.
Offsetting this is the likelihood of further increases in official interest rates, as the Reserve Bank of Australia (RBA) continues to focus on inflation and the unemployment data are suggestive of capacity constraints that can feed through to inflation in the latter stages of an economy’s growth cycle, particularly when growth is above sustainable levels as is currently the case in the Australian economy.
To date the rate increases have not been a problem for households as on the bank’s estimates each 0.25% increase in interest rates impacts household disposable income by around $2 billion – and the tax cuts have all but offset this.
The other factor that may impact on disposable spending levels is price increases on consumer items, Pearson pointing out this has indeed been the case across a range of items such as oil, rent and food items such as wheat and dairy products.
The bank expects the headline consumer price index to increase from a level of around 2.1% as at the end of September to 3.0% in the current quarter and stay around that level next year, which will slow the rate of increase in real household disposable incomes.
As a result Pearson expects growth in household disposable incomes will be shown to have peaked in the September quarter at around 5.5% and will trend slowly lower, though on the plus side for the economy he notes household savings should show some signs of increasing in coming months.
This won’t help retail sales though, Pearson forecasting a 3.0% increase in 2008, down from his expectation of a 3.7% increase this year.