The Heroes Of Australian Economy

11 March 2016
New data reveals Australian households led the economy in 2015 with their robust spending.

The Australian economy beat expectations to grow 3 per cent over 2015, and it has its free-spending households to thank.

According to data released by the ABS on the 2nd of March, real growth domestic product (GDP) rose by 0.6 per cent in the fourth quarter of 2016 to be 3 percent higher on the previous year. Most of the growth in this quarter was attributed towards household consumption which contributed 0.4 percentage points.

This news fed through to our share market which has rallied in early March. On Feb 29, the ASX 200 was at 4,880.90. As at March 8, it’s at 5,142.80.

Australian consumers – Our economic heroes

In spite of weak income growth, a drastically slowing mining sector and market fears perpetuated by a terribly pessimistic media, Australian consumers continue to carry our economy with their healthy spending.

Household consumption rose 0.8 per cent in the December quarter to be 2.9 per cent higher than the previous year. It helped push Australia’s GDP growth number for the year well beyond the Reserve Bank’s forecasted 2.5 per cent, to 3 per cent – a positive surprise for many economists.

It has led some, such as renowned business commentator Peter Switzer to bullishly state that the Australian economy is the best in the world:

The data underlines the importance of ordinary households to the strength of the Australian economy, particularly during this period of transition away from mining resources. Their spending represents over half the country’s aggregate demand, so when they spend less and save more, the country as a whole really struggles.

Still, in 2015 Australians spent more and saved less. In fact, the household saving ratio fell from 9.2 per cent at the mid-point of the year to where it stands now at 7.6 per cent. This current rate is the lowest rate of saving since before the global financial crisis.

What does this mean for 2016?

While this was all good news – providing a healthier-than-expected diagnosis of the economy – HSBC economists say we should bear in mind that these are 2015 figures.

“More recent timely indicators of business conditions and jobs growth have pulled back in early 2016,” they wrote in their Data Reactions report.

“Global growth is also weakening, and, domestically, uncertainty over the tax reform agenda and upcoming budget could weigh on activity.”

However, as at the 8th of March, the ANZ-Roy Morgan Australian Consumer Confidence index sits at 114.8 – above the long-term monthly average of 112.7.

ANZ Chief Economist Warren Hogan said Australians can generally be described as being confident about the economy despite some ongoing worries about the long-term.

“It now looks like 2016 is shaping up as a solid year for economic growth, albeit a little slower than last year,” he said.


What’s encouraging us to spend?

Low interest rates

It’s quite certain the environment of record-low interest rates has encouraged the lift in consumption and pushed saving rates down. The returns on offer via a savings account at the time of writing are often barely enough to cover the costs of inflation, so people have less incentive to keep their funds there, thus more encouraged to spend. The Reserve Bank has recognised this impact and has hence maintained the rate at 2 per cent since May 2015. They believe it to be an “accommodative” stance.

Cheaper petrol

It’s also likely that cheaper petrol prices have played a part. According to RACQ data, the average price of unleaded petrol in Australia’s capital cities dropped almost 25 per cent between June 2014 and January 2016.

Speaking of which…

What have we been spending on?

In the table below, you can see the spread of goods/services accounting for the 2.9 per cent increase in household consumption for 2015.

Consumption items Household consumption growth contribution (%)
Rent etc 0.48
Insurance etc 0.46
Recreation 0.38
Food 0.36
Health 0.36
Operation of vehicles 0.21
Other goods & services 0.2
Clothing & footwear 0.19
Furnishings etc 0.16
Communications 0.12
Electricity, gas etc 0.11
Purchase of vehicles 0.08
Transport services 0.06
Education 0.04
Alcohol -0.03
Hotels, cafes & restaurants -0.15
Cigarettes & tobacco -0.19

Source: ABS

Rent and insurance worked out to be nearly a third of the total increase in household spending over the year. While these two are quite boring, but necessary costs, the third biggest contributor to consumption growth maintained Australia’s reputation as a fun-loving nation – recreation, which accounted for 0.38 per cent.


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