Clouds on the horizon?

A significant concern for the economic outlook is whether the strength in household spending seen in early 2015 will be sustained. It’s an issue that was highlighted by last week’s Westpac McDermott-Miller consumer confidence index, which is a key leading indicator of household spending. Consumer confidence slipped back in June. And while it’s still a bit above its long run average, confidence is now well down from its mid-2013 high. So how concerned should we be?

There are some clouds on the horizon for household spending. Dairy prices are down, and we expect this will flow through to lower income growth and employment. We’ve already seen this reflected in a particularly sharp drop in consumer confidence in rural regions.

On top of this, the inflation environment is starting to look less benign than it has been recently. Petrol prices are up, and the fall in the exchange rate will push up the prices for a range of imported goods. Consequently, over the coming year growth in real labour income (i.e. earnings adjusted for changes in purchasing power) is going to look more moderate than it has recently.

But despite the above headwinds, we remain positive about the outlook for household spending over 2015/16. We do expect that there will be some softening in spending growth over the coming months. But that follows strong growth of 4.4% in the year to March, and still leaves us with a firm outlook.