Brace yourself for howls of financial pain

Stephen Koukoulas

Brace yourselves! Consumer sentiment and with it consumer spending are about to be hit hard with the 15 to 20 per cent rise in electricity and gas bills that took effect from 1 July.

This jolt will come on top of an already soft economy, which means the next few months will be troubling for the economy.

Of course, consumers (and business for that matter) haven’t yet got their power bills incorporating these higher charges, but when they do over the next few months, the impact is likely to be dramatic.

For those householders on fixed incomes or receiving pay rises at or below the average of about 2 per cent, the effect will be more acute. With demand for these utilities pretty inelastic, at least in the short term, there are likely to be howls of financial pain and misery reported when the bills reach letter boxes or email in boxes.

The media coverage, it seems certain, will be high profile, hard hitting and overwhelmingly negative. At a time when cost of living pressures are building, this extra hit to household finances will negative for the economy as spending is curtailed elsewhere to ensure the power bills are paid on time.

Also read: Your 10-second guide to today’s RBA rate decision

As things stand, the Australian economy is still weak. There is little if any evidence to allow one to confidently predict annual GDP growth rising to 2.75 per cent, let alone the 3 per cent plus growth rate needed to signal a respectable expansion.

In terms of the inflation rate, the signs are disconcerting with underlying inflation set to remain mired at or below the mid-point of the RBA target for as far as the eye can see. To be sure, headline inflation will get a big boost from the power price increases, but that will not feed through to the underlying measure which is more important to the RBA.

As noted, this less-than-rosy outlook for the economy is based in large part on the fragile nature of consumer spending, employment and wages. Household spending makes up over half of GDP which means that a troubled consumer that is disinclined to ramp up spending means a troubled overall economy.

While there have been a few monthly indicators a little stronger than expectations n the recent round of data releases, which is excellent news, others have been weaker.

For almost half a year, consumer sentiment has had more pessimists than optimists which has shown up in soggy retail sales growth. At the same time, new dwelling construction, including the important component of ‘alterations and additions’ is falling which means that investment in dwellings will cut away at GDP later in 2017 and into 2018.

Also read: Can ‘people power’ stop crazy energy bills?

At the same time, the Australian housing market is riddled with areas of weakness as well as the higher profile strength so frequently reported for Sydney and Melbourne. House prices are weak or falling in Perth, Brisbane and Darwin and price growth is slowing elsewhere, albeit from break-neck speeds.

The RBA index of commodity prices is also tumbling which poses a threat to Australia’s national income and puts in question the very tentative signs that business investment is near its low point for the cycle.

If you then throw in share prices, which have been doing next to nothing for many years, the scenario for weak consumer confidence, soft household spending and on-going lethargy in bottom line GDP is firmly in place. The rising power bills will only make matters worse.