I can not find a link for this. The person that sent it to me did not have one either. It seems accurate enough. Substitute the US or UK for Australia and you have a good picture of the situation worldwide:
JPMorgan continues to make the right calls on economy
13:16, Tuesday, 26 April 2005
Sydney - Tuesday - April 26: JPMorgan's chief economist
Stephen Walters says the great party is over; now the hangover.
Indeed, all of the tailwinds that propelled consumer spending
in recent years have become headwinds:
* house prices are falling, so the wealth effect has gone into
reverse;
* house construction is lower;
* debt servicing costs are a record high;
* consumer confidence collapsed after the RBA rate hike; and
* high oil prices are squeezing disposable income.
Walters says this means that all that remains to drive
household spending is real income.
Yes, the labour market is firm and the nominal wage share of
the economy is rising, but the unemployment rate will rise from here.
Also, inflation is rising, so household's real income is being
squeezed.
JPMorgan forecasts that consumer spending will rise just 2.2
per cent in 2005, less than half the growth rate reported in 2004, when
household spending was still growing at a rate far in excess of real
income.
Spending is likely to stay subdued in 2006 too, with
consumer spending likely to rise just 2 per cent.
The recent escalation in consumers. anxiety
about the economic outlook, both domestically and offshore, means the
risks for consumers are even more skewed to the downside.
Household spending contributes two-thirds of Australia's
national expenditure.
Consumer spending's contribution to total growth in the economy
probably will fall to 54 per cent this year and to just 36 per cent in
2006, the chief JPMorgan economist predicts.
Only an imminent rebound in business investment, a marked
improvement in exports, and more government largesse will keep
Australia.s economy from growing by less than 2 per cent this year and
next.
House prices are falling
-------------------------
The dominant theme underpinning JPMorgan's cautious view on the
consumer is the deteriorating housing market.
In particular, house prices are falling.
Much of the excess of recent years, when consumer spending rose
much faster than income, was triggered by soaring house prices, which
substantially improved the personal balance sheets of households and
allowed households to spend beyond their means.
Anecdotal evidence suggesting that house prices are falling is
not new or controversial.
What is new is that additional research by JPMorgan shows that
house prices are likely to fall at least another 5 per cent in 2005.
JPMorgan.s previous assumption was that house price falls will
be capped at 5 per cent.
The most telling indicator of house price movements is the home
auction clearance rate, because it captures imbalances between supply
and demand.
In Sydney, for example, the auction clearance rate remains well
below 50% (a depressing 37% last weekend), which is consistent with
much larger falls in house prices.
Wealth threatened
------------------
Falling house prices means that the wealth effect that
underpinned the surge in household spending goes into reverse.
Equity withdrawal from housing1 soared to a peak of more than
12% of household income in December 2003.
The fall in home equity withdrawal since then has tracked the
deceleration in growth in house prices, so much so that equity
withdrawal was just 5% of income at the end of 2005.
A negative wealth effect means that households probably will
accelerate their debt repayments because debt repayment, rather than
rising prices, becomes the only way to maintain equity in their homes.
Accelerated debt repayment means that household spending has to grow
more slowly than income growth.
House construction must eventually fall .
Oversupply in housing (housing starts in 2004 were 164,000 .
underlying demand is 155,000), means house construction eventually must
fall.
The imminent fall in home construction activity is a
significant headwind for consumers.
Typically, home construction triggers housing-related spending
on whitegoods, furnishings and electronics.
In this way, the surge in home construction in recent years
helps explain the boom in discretionary household spending.
That said, the process also works in reverse, and
JPMorgan's housing starts model2 forecasts that national housing starts
will fall to 149,000 in 2005 and 140,000 in 2006.
There still is a swollen pipeline of home construction to be
completed, but construction backlog is depleted, lower house
construction will be a significant negative factor for consumer
spending and debt servicing costs are at a record high
The Reserve Bank raised the cash rate 25bp in March and
probably will do it again in coming months.
The higher cost of capital has combined with record levels
household debt to push the household debt servicing ratio to an
all-time high.
A 25bp policy tightening by the RBA would push the debt
servicing ratio to a record high share of income and would become an
even larger squeeze on household spending power.
A 10% debt servicing ratio will particularly squeeze marginal
households who over borrowed chasing soaring house prices, but is
unlikely to be a trigger of widespread financial distress.
Home loan delinquency rates as reported by the major Australian
banks remain at all-time lows, despite the debt servicing ratio already
being record high.
Unemployment rate
-----------------
JPMorgan's forecasts of the unemployment rate) shows that
consumer spending also is highly correlated with trends in the labour
market.
In this way, the drop in Australia's unemployment rate in
recent years to the current multi decade low of 5.1 per cent also has
been a key driver of the surge in household spending.
Firm job growth (a record 290,000 jobs in the last seven
months), boosts household income and spending power.
Unfortunately for households, conditions in the labour market
are about as good as they can get.
Job advertisements have fallen in three of the past four
months, the employment net balance in the National Australia Bank's
business survey has fallen from 13 in November to just 4 in March, and
firms are facing a margin squeeze from rising costs and lower revenue
growth because of the slowing economy.
This probably means that hiring will slow.
Likely job growth closer to 15,000 per month rather than the
frenetic pace of 37,000 over the last six months will not be enough to
absorb new entrants to the labour market, particularly now that the
intake of new skilled migrants is increasing by 20,000 persons per
year.
JPMorgan therefore forecasts that the unemployment rate
will rise to 5.8 per cent by the end of 2005 and to 6.5 per cent by the
end of 2006.
Rising unemployment will squeeze household income and will be
another headwind for consumer spending.
Consumer confidence collapsed after the rate hike .
Consumer confidence plunged a record 17% following the RBA's
first policy tightening in March and 'bounced' just 2% in April despite
the RBA leaving the cash rate unchanged the previous week.
Clearly, consumers reacted badly to the RBA's
first rate hike and the revelation the same day that Australia's
economic growth stalled in Q4.
Optimists continue to outnumber pessimists (just) in the
Westpac Melbourne Institute confidence survey.
That said, further falls in consumer confidence are likely now
that interest rates are poised to rise again, house prices are falling
and the AUD is falling (confidence tracks movements in the AUD because
the currency influences import pries and overseas travel costs)
And high oil prices are squeezing disposable income
Petrol prices have soared in response to the recent rise in
crude oil prices to a record high.
Households' expenditure on petrol is inelastic, which means
rising energy costs effectively are a tax on household income.
JPMorgan forecasts that oil prices will remain in a US$40-50
range over the remainder of this year, but oil prices lead trends in
household spending by six months.
This means that this year.s oil price spike has yet to be fully
felt by households.
Moreover, the likely fall in the AUD later this year will
exaggerate the impact on Australian consumers. |
