Households to face ‘challenging environment’ in 2024, AMP predicts
A softening labour market and a decline in household wealth are expected to impact consumer spending this year, according to an economist.
A slight fall in house prices this year could see a decline in household wealth in Australia, while a softening labour market may impact household incomes, says AMP deputy chief economist Diana Mousina.
Ms Mousina said household income data from the OECD indicates that Australia had one of the lowest rates of annual real household disposable income per person compared to its OECD peers.
Over the year to June, Australia’s real per capita household disposable income was down by 5.1 per cent, compared to a 2.6 per cent rise across OECD countries.
“This occurred despite very healthy labour market conditions in Australia which saw employment growth running above 3 per cent per annum all year, the unemployment rate remaining below 3.9 per cent and underemployment continuing to be low, all of which boosted wages growth,” she said.
“Despite this positive earnings backdrop, the income tax burden increased in 2023 as households have been moving into higher income tax brackets as well as the end of income tax concessions.
Mortgage interest repayments have also been an increasing drag on incomes with the cash rate increasing 425 basis points since May 2022.
Australia’s very high population growth in 2023, running at 2.4 per cent over the year to June 2023, also masked a fall in household disposable income growth per person, relative to other OECD countries, said Ms Mousina.
Household wealth, on the other hand, increased in 2023 off the back of rising house prices.
Ms Mousina noted that around 70 per cent of Australian household wealth is tied to the value of homes and moves closely in line with home prices.
Australian household wealth as a share of household disposable income has been at the top end of its OECD peers in recent years.
However, household wealth may start to come under pressure this year with AMP predicting that home prices will decline 3 to 5 per cent this year, said Ms Mousina.
“High household wealth holdings will not be enough to offset a challenging environment for households in 2024, despite some easing in cost-of-living challenges,” she said.
Household income growth may slow further as the labour market weakens and the unemployment rate increases, she added.
“This environment is expected to be negative for consumer spending and GDP growth. We see GDP growth rising by 1.2 per cent over the year to June 2024, below the RBA’s forecast of 1.8 per cent and anticipate the unemployment rate to increase to 4.5 per cent by mid-year.”
Ms Mousina said where household wealth declines, households tend to feel less secure which tends to lead to an increase in savings and a decline in spending.
“This relationship does not always work. Most recently in the pandemic, household wealth rose in 2021-22 alongside the lift in home prices but the savings ratio also surged thanks to government-driven stimulus cheques,” she said.
“Since then, the household savings ratio has been falling but growth in total consumer spending has been low. We expect that the household savings rate will continue to fall in 2024 as it normalises after the pandemic but growth in consumer spending will still be low.”
The cost of living crisis is expected to improve in some areas for consumers, however, with inflation expected to slow and the RBA expected to start cutting interest rates around the middle of the year.
About the author
