Australian data doldrums…the wealth effect shifting into reverse

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 combines with a fall in the ANZ Job Ads Survey of 0.6% in August which now indicates a headwind to further falls in the unemployment 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 recent 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 a ‘reverse’ wealth effect is that with house prices at elevated levels at around seven times income, that should house prices fall say 10%, then real consumer spending would reduce by 1.25% and 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. Households may now need to assume the ‘brace position’.

CH House Prices_Website-01

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 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.

Paul Ashworth, Managing Partner (paul.ashworth@cameronharrison.com.au)
Anne-Marie Tassoni, Partner (am.tassoni@cameronharrison.com.au)
David Clark, Director (david.clark@cameronharrison.com.au)
Tristan Bowman, Manager (tristan.bowman@cameronharrison.com.au)