Consumers wave the keys to a recovery vehicle

The Reserve Bank board should allow itself some congratulatory tea and biscuits this morning: monetary policy is still working.

Champagne corks, of course, remain off the menu. But it’s not a boom the bank is looking to engineer, only a solid return to more normal levels of activity in construction, housing and retail.

How easily we forget, amid all the talk of mining booms and ‘making things’, that the Australian economy has for a long time been built on the consumer’s back.

Even at the height of the mining boom, household consumption spending accounted for more than half of the economy, dwarfing the dirty black and brown stuff.

If it’s economic growth you want, it’s consumer spending that must recover.

And – fingers crossed – that’s exactly what we’re seeing.

Those looking for a return to the heady, debt-fuelled consumption days before the GFC will always be disappointed.

But a return to growth in consumer spending is indeed underway.

Retail sales are up 3.1 per cent over the year to April. Sure, it’s not the 8 per cent plus growth we saw back in 2007. But such growth was unsustainable, fuelled by the halving of nominal interest rates. That was a boom which is permanently at an end.

And bricks and mortar retail stores have never captured all consumer spending. Retail spending does not capture all the money we spend on services, like haircuts, doctor’s appointments, dog walkers and nannies. Tomorrow’s GDP report will give us a more accurate picture on that. We already know that sales of new motor vehicles are growing by a slightly faster clip of 3.3 per cent a year.

Even so, retail sales growth of 3.1 per cent is now entirely in line with wages growth of 3.1 per cent on the latest March quarter wage price index.

Consumer confidence may have slumped in the wake of the May federal budget. But consumers have been twitchy for a while.

When it comes to Aussie consumers, it’s a case of ‘ignore what I say, see what I do.’

And despite our new debt-shy ways, there are signs of life in home borrowing too. According to the Reserve Bank’s own figures, housing credit appears to have bottomed out at 4.5 per cent growth over the year to April.

Sure, that’s nothing compared to the 20 per cent plus growth seen during the early to mid-2000s. But that’s not the point. We’re not looking for the next highly leveraged housing boom, only that borrowing should increase in line with wages and population growth.

And despite falls in April and May, house prices are up a respectable 2.9 per cent over the year, according to RP Data-Rismark, giving a median value of $491,000. 

Some confidence also appears to be returning to new home approvals, up 27.3 per cent over the past year. Of course a small base means big percentage gains are possible. We are still building only half the number of homes needed to house population growth of 300,000 a year.

What we really need is a home construction boom, not a home price boom. So far so good.

A look at the broader economic dashboard also reveals an economy remarkable in its unremarkableness. Inflation at 2.5 per cent. Unemployment rate at 5.5 per cent. And tomorrow’s national accounts are predicted to show gross domestic product grew by 2.7 per cent over the year – a little below its long-term average of around 3 per cent.

Could this be the new normal we have been looking for? After so much excitement, we should be glad to return to such a boring world as retail spending and borrowing growing in line with incomes. 

Meanwhile the six-cent fall in the Australian dollar has removed yet another remarkable feature of the economy.

Indeed, it’s steady as she goes. Today’s meeting of the Reserve Bank looks like being a central bankers’ dream: boring.

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Comments Policy » much of our extra retail spending goes overseas ( on imports) ?

Low interest rates are hurting consumers with savings. Savers are being forced to save harder and that means less discretionary spending in the shops for non-essentials.

Low interest rates are sending a clear message to consumers that bad economic times are heading our way. Don't be surprised if people are reluctant to spend money they do not have. People will be afraid to borrow money even at low interest rates if job security is a worry.

well said Frans

And don't forget those people whose income is dependent on interest rates ie retirees. They also contribute to retail spending and are, I read somewhere, more numerous than those with mortgages.

Frans, is totally correct, Jessica. It appears, from what you are saying that Australia, is on a "Magic carpet ride". Yeah sure, how will we create jobs for 300,000 new Aussies, this year?

The bottom line, is energy costs. All business activity and SMEs have the cost of energy in common. Exports are hit hard by the cost of transport.

So, whats the answer? Spend money, on energy research, lets talk about quantum physics. Afterall, when you talk about energy, you are talking about quantum physics. This is real geek stuff. Many of the population delude themselves into thinking, that energy is what you get when you flip a switch, to turn your power on. Or that energy problems are what you get when, when your electricity and gas bill arrive.

It's just a smidgin, more complex than that. It's like looking at the period between feudalism and the industrial revolution. We are leaving the steam age and moving into the age of quantum mechanics. Now most of our spending patterns, revolve around electrical goods and that means producing clean energy.

So, is our economy about monetary policy? only if you still long for the age of steam.

Ken you should run for president of the solar system Your thinking should not be constrained to Earth alone...

Interesting list of indicators in the article Jessica, yes.
...but all so smooth, must be a catch somewhere, month of June, parliament session ending, hmm!
Ah! time to lift the the ceiling on borrowings to $0.4t, perfect moment also for securities coming, last days of June, one line of small print added in a mountain of doc, Oakshott already praising treasury for the tick, repeat of June 30. 10-11 on the Cards, sure not another $0.2t?
For the States no need, the loan council has abolished the last check and the ceiling on borrowings, no wonder State debt at $0.4t is higher than Commonwealth.

Look like the boom has gone on the credit card and mortgages but stop the mining boom, 25% of cash less flowing directly or indirectly into the economy, foreign real estate buyers taking a shy and construction a cold with as much less flowing into the economy, a couple of coalition tax zombies or musketeers ready to pounce, tax levels reach overseas Europe pub with no growth, and life is on the edge again, ha! hang on, I am safe, I got an old gas metre, water tank and electric pump for sale....
Interesting times.

Jessica, you are correct that we need a construction boom, but it could not happen until the banks would start offering project finance to the developers and unless the planning controls are relaxed. Sydney, for instance, is very underdeveloped (people/hectar) and the demand is where the infrastructure is, in brownfield, not greenfield zones.

Store retail is flat. Online is growing while the dollar is still up.

The half million dollar mortgagees i know are on noodles. House sales are speculators sick of negative yield and foolishly thinking there will be capital gains again.

Green shoots! Where are those green shoots?

"House sales are speculators sick of negative yield and foolishly thinking there will be capital gains again."
I think apart from the odd sharp eye for a bargain, most savers (largely baby boomers) seeing negative yields elsewhere are back in housing to protect their capital, merely expecting house prices to average inflation in future. As well there are a lot of lean work builders buying rundown aging housing stock, renovating and refurbishing and flipping them just for continuity of work. How the housing pricewatchers adjust for that trend is anyone's guess but most likely they do it inadequately.