Discretionary spending on holidays, meals out, clothes and updates of car and other consumer durable goods will be curtailed.
Before this wealth destruction, household spending was soft. Up to their eyeballs in debt, consumers were starting to moderate their spending and this was a critical reason that bottom line growth in domestic demand was subdued. It was also a reason why the RBA was unable to follow through with its preconceived agenda to lift official interest rates – the economy could not possibly absorb such a move. As the year-end sales period for retailers moves into full swing, the drivers of consumer spending look parlous.
It would be a near miracle if retail spending (per capita) rises in the December quarter which could see bottom line GDP growth slip to 0.5 per cent or less.
With retailers set to embark of widespread discounting to reduce their inventory, inflation will remain extremely low, most likely well below the bottom of the RBA’s 2 to 3 per cent target range.
The implications for the unemployment rate are worrying. Already, the reliable ANZ job advertisement series has topped out, and is pointing to no further progress in reducing the unemployment rate. Further, the business expectations survey pointed to a dip in firms’ expected employment levels through to the end of 2018.
The RBA forecast for unemployment to hit 5 per cent and stay there are looking increasingly shaky.
The $7 trillion question is how much more wealth will be lost as house price falls continue and the stock market ructions continue to impact the ASX.
Whatever the exact amount, it is safe to say that the falls already witnessed are enough to hurt spending for the next few months. It means the RBA will not be hiking interest rates any time soon and indeed, the door is wide open to an interest rate cut early in 2019 if the deteriorate sees unemployment back above 5.5 per cent and inflation entrenched below 2 per cent.
Tough times indeed.