Retail sales for July were unchanged from June, going against hopes for a rise of 0.3%. Whilst only a monthly statistical read, it joins a number of poor monthly reads. This, combined with a fall of 0.6% in the ANZ Job Ads Survey in August, now indicates a headwind to further falls in the employment rate.

Also released today was CoreLogic’s National Home Value Index which declined 0.3% in August. Most noticeable were the continued declines in Sydney (-0.3%) and Melbourne (-0.6%). Whilst not predicting imminent property collapse, the negative movement in house prices is gathering some momentum and will not be helped by recently depressed clearance rates over the last few weeks. What it does portend is that a ‘reverse’ wealth effect for households may be in progress.

What we mean by ‘reverse’ wealth effect is should house prices – currently at elevated levels of around seven times income – fall by 10%, then real consumer spending would diminish by 1.25%. This would seriously harm domestic demand (refer chart below). The changed structural environment for credit supply combined with the Hayne Commission is a further significant ‘downdraft’ on domestic activity and household credit. Up until recently, Australian domestic demand has been experiencing and benefiting from a positive wealth effect. In this context, households may now need to assume the ‘brace position’.

We have been concerned with the reversal of the wealth effect in Australia given its strong influence over recent years due to rapid property price inflation. We may now be at the beginning of the reversal effect. Cameron Harrison typically takes a 12 to 15 month forward view when incorporating these assessments into our investment strategies. This is the case in this instance where we have pre-positioned for adverse adjustment in the household sector.

More specifically for credit exposure, we see pressure on bank funding spreads (in addition to funding pressure banks are experiencing in USD debt markets). For equity strategy exposure, we remain materially underweight in both bank and consumer discretionary sectors. For our multi-asset class strategies, we recently reduced our already strategically low Australian equity exposure. For official interest rates, the ‘lower for longer’ mantra is well and truly entrenched which amongst other things provides further downward pressure on the Australian currency.

For more information on our approach to economic strategy or any other inquiries, please contact us on +613 9655 5000.