Weekly Reports | Nov 24 2023
Population growth is obscuring a fall in household consumption, the case for housing-exposed stocks & the lack of financial advisors.
-Declining consumption obscured by population growth
-The case for housing-exposed stocks, with reservations
-Financial advisor numbers lag expected demand
By Mark Woodruff
Declining consumption obscured by population growth
The main reason household consumption growth in Australia has remained in positive territory is population growth, argues Oxford Economics, pointing out real spending is being weighed down by inflation and higher interest rates.
In close to the fastest pace on record, net overseas migration has surged to 490,000 in FY23, and will likely remain elevated at around 375,000 in FY24, notes Oxford. These numbers represent year-on-year population growth of 2.3% and 1.9%, respectively.
Despite briefly returning to the pre-pandemic trend in the third quarter of 2022, consumption on a per-capita basis has declined for the last three quarters.
Spending on essential items has tracked sideways since covid and has failed to return to its pre-pandemic trend, indicative of an inflation squeeze, suggests Oxford, and the effectiveness of monetary policy in curbing spending.
Oxford attributes the relative weakness in spending on essential items to falling consumption-per-capita on food, utilities, and vehicle maintenance, along with reduced spending on insurance and financial services.
The rebalancing of consumption between goods and services has finished, suggests Oxford, after the pent-up spending on services following covid. The share of spend on goods is stabilising very close to its pre-pandemic average.
Oxford believes this decline in consumption-per-capita is approaching its nadir, and forecasts the metric will track sideways over the next year.
During 2025, it’s thought a recovery in real incomes, along with cash rate cuts (during late-2024 at the earliest) will facilitate a rebound in spending.
Nominal wages growth will be supported by an ongoing tight labour market, while inflation should return towards the Reserve Bank’s target range.
Both of these outcomes should support real wage growth, suggests Oxford Economics, thereby boosting disposable income and consumption growth.
The case for housing-exposed stocks, with reservations
Jarden likes to track where the housing market and residential construction are positioned in the cycle, given housing is a key driver of both the macroeconomic cycle and of housing-exposed stocks such as banks, building materials, residential REITs, and retailers.
At present, the broker determines the residential construction sector (generally) remains in the contraction phase and should remain subdued until 2025 given affordability constraints.
By contrast, the analysts point out the Australian housing market has moved firmly into the recovery/expansion phase from contraction.
This time around, however, there are two factors undermining the usual theory of increasing one’s investment exposure to housing cyclicals at this juncture.
Firstly, the high-price/low-volume housing recovery reduces the macroeconomic benefits, explains Jarden.
The economy normally benefits not only from dwelling construction but also turnover in the existing housing stock, which triggers additional consumption.
Broader housing activity, which includes ownership transfer costs and durable goods consumption, explains the broker, represents 12-15% of nominal GDP, yet because of volatility within the housing cycle, it often represents more than a 20% share of domestic demand growth.
Secondly, the prospect of higher-for-longer interest rates acts as a drag compared to rate cuts of -15 basis points per quarter historically associated with a recovery.
The analysts will adopt a more positive view on housing cyclicals when signs emerge of a broadening housing recovery on higher volumes. Also, there needs to be greater confidence around a pause by the Reserve Bank on further tightening of interest rates, and the prospect of eventual easing.
Despite this overall caution, Jarden still asserts housing cyclicals should be held in the current phase of the cycle.
The combination of house prices in recovery and expanding home sales historically leads to an average quarter-on-quarter performance of 8% across a basket of 35 housing-exposed stocks, according to the broker’s historical analysis.
Financial advisor numbers lag expected demand
Australians may suffer from a lack of crucial advice, as financial adviser numbers are barely keeping pace with expected consumer demand, according to data gathered by financial sector researcher Rainmaker Information.
While the number of financial advisers has stabilised at around 16,000, and is projected to climb, such levels may not be enough to avert a supply shortfall, according to executive director of research and compliance, Alex Dunnin.
A mismatch between advisors and advisers is evident from the -43% decline in financial adviser numbers since December 2018, and the projected 17% increase in the number of individuals aged between 55 to 84 years in Australia by the end of the next decade.
While the number of advisers may be stabilising and approaching the bottom, Rainmaker anticipates adviser numbers will remain within the range of 15,000 to 18,000 for the foreseeable future.
“Australia's financial advice industry must remain agile and proactive in finding innovative solutions to bridge the adviser shortfall, ensuring that financial advice remains accessible and reliable for all Australians,” suggests Rainmaker.
Rainmaker Information is owned by Institutional Shareholder Services, a provider of data, analytics and insights to the global financial services industry.
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