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Thursday, 3 March 2016

Are we really getting poorer?

GDP growth at 3 per cent

The Reserve Bank of Australia as lamented on more than one occasion that market commentary tends to focus relentlessly on the negative.

And strewth, they aren't wrong abut that! 

Despite a thousand recession predictions for 2015, in the end we never really got close, with the economy growing by a healthy +3 per cent

Of course, there are always good and bad parts to any economy (a quick Google search for "unbalanced recovery UK" yields hundreds of thousands of results, for example) but you would think that the economy picking up the pace would be cause for celebration.

Alas, not so!

It never ceases to amaze how many people are openly hoping for a harsh recession and rocketing unemployment. You only have to look at the gloating comments on the articles about bankruptcies and foreclosures in Gladstone and Mackay to see what I mean. Peculiar world.

We all know about falling commodity prices from the bubble peak of July 2011 - this has been an ongoing reversion for nearly half a decade, after all - one of the results being a decline in real national net disposable income per capita of 1.1 per cent in 2015.

We get that, but given the large declines in business investment, the response from the rest of the economy has been pretty good in the circumstances.

Are we really getting poorer?

But are households really getting poorer as a result of lower commodity prices as is the suggestion?

The answer is no, because households are not paid in cyclical commodity earnings.

Wages growth has been subdued, this is indeed true, but wages growth in 2015 was still fully double the cost of living increase for employee households, and slower wages growth can be a positive to the extent that it helps to keep unemployment down.

What is clearly the case is that there is huge disconnect between the fortunes of the mining and the non-mining economies, and in few places is this more evident than in the wages data itself. 

Herein, it is clear that wages growth in mining and construction has dragged down the national average for wages growth in 2015, yet wages growth in sectors such as education & training, finance & insurance, manufacturing, retail trade and health care & social assistance was all pretty good. 

Household wealth

What about household wealth? We'll have to wait until later in the month for the December 2015 quarter data, but the most recently available figures show household net worth hitting a record $8.49 trillion as at September 2015. 

Aussie share markets fell quite sharply from July to September, markedly impacting superannuation balances, as you can see in the chart below.

Yet despite endless predictions of doom, gloom and searing pain through the financial crisis, total household wealth has doubled over the past 11 years. 

As you might expect, rising house prices have played a significant part in this, although it has been good to see gearing ratios declining since June 2012.

Mortgage debt has increased in aggregate as you can see in the next chart, but after accounting for offsets and mortgage buffers, the household debt to income ratio has barley increased for about eight years, while mortgage repayments have been getting much cheaper.

An interesting aspect of recent housing market data has been that far from the national property market deflating, price growth may be rippling outwards from Sydney and Melbourne into Brisbane, Hobart, Adelaide, and Canberra, while low interest rates have even supported the resources capitals better than many expected. 

It is increasingly looking like another year of dwelling price gains in 2016, though it should be noted that in many Queensland regions and towns house prices have been clobbered, such as in Bowen, Mackay, and so on.

The wrap

The figures show aggregate household wealth at record highs, so households are demonstrably not getting poorer.

Of course not every household is better off, that's a given, while unemployment and under-employment is still quite elevated, if not as high as had previously been forecast. 

We'll have to wait a few weeks for the latest household wealth figures to the end of 2015, which may show that poor share market performance has dragged down superannuation balances (if the Aussie share market was a dog, it would have been put down by now, as the old saying goes).

The brighter news for national income is that the iron ore price has rebounded by more than +37 per cent since December 11, while the oil price is up by fully +30 per cent in only three weeks. Even the lowly copper spot briefly glanced US$2.20/lb overnight (not before time, I might add!).

Local share markets also touched a two-month high today, so any such hits to superannuation balances appear likely to be only short lived.