Good for the gander... but what about the geese?

market analysis

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By

Paul Ashworth, Managing Partner
David Clark, Director
Antony James, Analyst


Posted 02 November 18

The Australian economy is expanding, with GDP of 3.4% and unemployment at 5.0%. This growth has supported the increased revenues of the ganders (Commonwealth and State Governments)... but what about the geese (households)?

The Australian economy is growing strongly, with GDP of 3.4% and unemployment at 5.0%. However, the macro data is obscuring the frailty of household finances that are starting to wobble under the strain of a multi-decade long debt binge and insipid wage growth.

Good for the gander…

Over the past ten years, positive demographic trends and higher immigration, have supported growth in government revenue, and in turn, government spending.

The Commonwealth Government has seen its total tax revenues increase by 36%. Nearly 70% of this increase stemming from higher personal income tax receipts, which have increased by 56% in absolute terms. Interestingly, receipts from corporate tax during this period have increased by just 2%, adding fuel to the union movement's fire.

At a State level, the story is similar, receipts from population growth stimulated taxes - such as stamp duty, payroll and motor vehicles - have delivered a remarkable 55% increase in state revenues. The most significant increase has come from property taxes (stamp duty + land tax), the result of rising property prices and increased transactional volumes. Across all state’s property taxes have increased by 67%, for Victoria and New South Wales the increase is more marked, property taxes have more than doubled.

This model for growth that has relied on population growth in the absence of productivity improvement is unsustainable. At best the macro growth that we are enjoying is papering over the cracks in the Australian economy.

Commonwealth Government Receipts (LHS) and State Government Receipts (RHS)

… but not for the geese

Normally, this type of economic performance would be enough to ensure that the ruling government would enjoy a healthy approval rating. However, there is growing unrest among voters who feel they are being squeezed between rising living costs and insipid wage growth. Moreover, they are not wrong!

Over the past five years, State and Federal Governments have seen their revenues increase by 37% and 23% respectively, over the same period the wage growth index increased by 12% and per capita GDP by just 8%. When we factor in the rising costs of essential living expenses - electricity, healthcare and so on - we see that households have experienced zero growth in real disposable income per capita since 2011.

State vs. Federal Tax Receipts (Normalised)

For decades GDP and Household Disposable income have moved in tandem, in a case of what was good for the goose was good for the gander. Since 2011, this correlation has broken, increasing the size of the economy without improving the wealth of its constituents.

Per Capita Household Income and Real GDP

In the absence of rising income, households have embarked on a self-perpetuating debt spiral, bingeing on cheap credit to maintain their lifestyles, drive-up house prices, and generating a positive wealth effect that reinforces the decision to borrow more debt at lower interest rates.

This debt spiral, much like a Ponzi scheme, continues until the supply of new money stops, or in this case, the supply of cheap credit stops. Australia has now reached its credit growth peak, with supply grinding to a halt following the fallout of the royal commission and housing pricing now in decline. Without the continued windfalls of lower mortgages rates and property-driven wealth effects, household finances now look precarious with the household savings ratio below 1% for the first time since the GFC.

Implications for Investors

Overall, the Australian economy is poorly positioned, the macroeconomy has become dependent on population growth and its macro by-product. However, in the process, households have become obscured from sharing in the economic macro growth story and are now constrained by its credit profligacy since the GFC.

The takeaway points for investors are:

  1. Underweight: Sectors that are reliant on disposable household spending - retail and banking - are expected to endure a bumpy ride
  2. Overweight: Infrastructure projects, such as toll roads, that are tied to population growth will be more resilient in a downturn.
  3. Be Active: Markets are going to be more volatile over the next 12-months, rapidly creating opportunities and risks, it is important to have flexibility in your asset allocation to capitalise on short-term changes.

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