Household spending more sustainable: RBA

Household spending and financing is now on a more sustainable path, which will ultimately benefit the health of the economy, says Ric Battellino, the Reserve Bank of Australia deputy governor.

“This adjustment in consumer behaviour has created a difficult trading environment for some businesses, coming as it has after a prolonged boom,” Battellino said.

"But the adjustment in Australia has been benign compared with the adjustments in household finances and housing markets elsewhere in the world, and it has put household spending and financing on a more sustainable path," he told Citi's third annual Australian and New Zealand investment conference today.

He suggested while it was possible that the global economic situation might take a sharp turn for the worse, "at this stage the bank's central scenario is that global GDP growth will be broadly in line with its long-run average over the period ahead.

"That would create a reasonably benign environment for the Australian economy."

He noted the recent constant theme of the bank's view that there had been a structural change in household spending and financing in Australia.

"After a 10- to 15-year period during which households increased their gearing and reduced their rate of saving, they have returned to a more conservative, and traditional, pattern of financial behaviour.

"Household credit growth has slowed to a rate in keeping with, or slightly below, the growth in household incomes,” he said.

"The saving rate has increased to a level that is more normal based on history; and household spending growth has slowed from a rate that substantially exceeded household income growth, to one that, over the past year, has been broadly in line with income growth.

"Within total consumer spending, there appears to have been a shift away from spending on goods in stores to spending on services, particularly services such as overseas travel, eating out and entertainment.

"As a result, retail sales have been particularly weak," he noted.

Battellino suggested it remained to be seen how the Australian economy would respond to the recent financial volatility and the consequent fall in confidence and the loss of wealth.

"Retail sales have picked up a little, housing loan approvals also seem to be picking up somewhat, most measures of business conditions remain around average levels and the most recent employment data have been more positive after a number of weak months.

"Nonetheless, job vacancies and advertisements are lower than their peak around the start of the year, overall credit growth remains subdued and the housing market remains soft.

"Recently, there has been some easing in financial conditions following the fall in market interest rates that has accompanied the financial volatility,” he said.

"Banks have passed through to borrowers notable declines in interest rates on term housing loans and some business loans, as their cost of funds has declined.

"Increased competition among banks in response to the increased availability of deposits and relatively subdued demand for loans has also resulted in some shaving of interest rates on standard variable mortgage loans for new borrowers.

"As a result, the interest rates on new loans are now around 10 to 15 basis points lower than they were early in the year.

"The modest net fall in the exchange rate in recent months has also, to some extent, reduced pressures on some sectors of the economy," he said.