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CHART OF THE WEEK: A TRIFECTA OF TROUBLES HAS WARRANTED THE RBA CUTTING INTEREST RATES

03 July 2019

Bob Cunneen, Senior Economist and Portfolio Specialist
 


Source: Australian Bureau of Statistics (ABS).

The Reserve Bank of Australia (RBA) has cut interest rates again by 0.25%. This now sees the official cash interest rate fall to only 1%. This seems extraordinarily low given that the Australian share market has generated a robust 20% return in the first half of 2019 and jobs growth is solid.

However the key concern for Australia is the consumer’s resilience to a trifecta of troubles. Falling house prices, high household debt and slow income growth have proven to be a troubling trio for the Australian consumer. This trifecta of troubles has seen the consumer struggle to maintain their spending appetite. Notably the very sharp falls in both new housing construction approvals (blue line) and car sales (red line) over the past year shows that Australian consumers have become very cautious.

Yet there is no guarantee that lower interest rates will provide the turning point for consumer spending and the housing market. Consumers could remain cautious, preferring to meet their key essentials of existing debt commitments, electricity and health care costs rather than increase their retail spending. However a combination of lower interest rates and the Federal Budget’s income tax cuts for low to middle income earners should help support the Australian consumer to eventually open their wallets and purses. 

 

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