Balancing act: Australian households remain resilient

But what if you were told Aussie households were more resilient than the headline figures suggest? To get to the heart of what is really going on with household finances – and to help us look forward to the year ahead – there are a few points worth noting.

“The key thing to supporting household incomes in Australia this year is getting inflation down.”

The first is real household incomes heading into this interest rate hiking cycle were elevated thanks to COVID stimulus measures. 

The longer-term trend in real wages in Australia is also more positive than you might think – this becomes evident if you compare different measures of wages. If we look at the broader wages bill measures in the national accounts, the structural change towards higher paying jobs which boost average household incomes becomes clear.

The commonly discussed Wage Price Index doesn’t pick-up structural change across the economy. This means in periods where there is a rapid shift toward higher paying jobs – as there has been over the past few years – the Wage Price Index will understate wages growth. 

Looking at all these things together, the level of household income at the end of the first quarter of this year was only a little below a pre COVID trend. That’s even after taking inflation and interest rate increases into account. 

Add to this picture the savings buffers – in aggregate – accumulated during the COVID years remain untouched. That’s still the case, even allowing for the decline in the household saving rate recently. 

It is important to note circumstances facing individual households can and will differ from any aggregate picture. We’re not suggesting there aren’t households under serious financial strain in Australia because of inflation and rate rises.

What the research shows is if we step back and ask ourselves where the economy might go over the next 18 months, it is not as negative a picture as some might suggest.

Yes, we are starting to see a decline in discretionary consumer spending. This had been elevated as households spent on the things they couldn’t during the COVID lockdown years.

Over the course of this year we believe discretionary spending will fall further as it comes back to a more normal level with essential spending growing roughly in-line with population. All this means overall consumer spending this year will not grow by much.

But some factors negatively impacted real incomes over the past year, such as interest rates, will likely peak in 2023. Other negatives, such as inflation, have already started to moderate. This means household incomes should start to improve a little over this year and into next. 

This improvement means household spending could well pick up during 2024 – even before any interest rate cuts.

Are there storm clouds on the horizon? There is a lot going on in the economy right now. There are international influences and general uncertainty overseas. The most recent interest rate increase from the Reserve Bank of Australia and possible future hikes will also impact households and the economy. 

But the key thing to supporting household incomes in Australia this year is getting inflation down. 

It’s also important the business sector stays healthy and continues to employ. With the unemployment rate at just 3.7 per cent, it is still close to a 50-year low. And business conditions remain at above average levels.

Maintaining strong employment and business conditions will be important to ensure the economy and jobs growth continues to tick over, even as the economy slows further to tame inflation. 

Adam Boyton is Head of Australian Economics at ANZ.