Yahoo Finance Consumer spending: the core of the 2022 economic recovery
While the economy is made up of many moving parts - all of which are important with their contributions to creating jobs and boosting business - consumer spending is the mainstay of whether the economy is strong, weak or something in between.
As society and the economy emerge from the array of COVID lockdowns, it will be growth in consumer demand that will play a critical role in how the economy performs in 2022.
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At the moment, conditions are positive for consumers, ensuring they will play a key role in driving a strong economic pick-up that will result in a quick path to full employment, with inflation getting close to the top of the 2 to 3 per cent target band sooner than later. A welcome and long-overdue lift in wages growth will help achieve this inflation result.
Employment outlook rarely been better
Consumer spending is fundamentally determined by some simple issues.
Employment is clearly important. If you have a paid job, you earn an income.
The money put into your bank account each week is fundamental to the amount you spend.
Put another way, it is difficult to maintain a level of spending if you are unemployed.
Wages finally growing
Linked to employment is wages. With solid growth in wages, household incomes rise and, with that, purchasing power improves.
Right now, wages growth is on a clear path higher. Skills shortages and huge demand for workers through the various job vacancies series points to wages growth hitting 3 per cent and more in the next 6 to 12 months.
This bodes well for spending.
Confidence is up
Confidence is critical for spending. If consumers are nervous about the economic outlook, they will tend to hold back.
This showed up clearly during the COVID lockdowns in both 2020 and 2021, where savings skyrocketed and spending collapsed.
Consumer confidence is currently healthy.
Debt and savings
Speaking of savings, the household sector has a proverbial war-chest of money in bank accounts.
The proportion of income householders have added to savings has been well over 10 per cent since the start of 2020. This is well above the long-run average of 5 per cent.
There is a huge pool of funds ready to be injected into the economy as the post-COVID opening-up unfolds.
Consumer spending can also be influenced by the household sector’s appetite for debt. On this score, the evidence points to a damper on consumer spending, and this is a partial offset to the raft of positive influences working in the other direction.
While household debt has edged lower over the past two years, it remains elevated. The potential for a rise in debt to drive a lift in spending is limited.
Household wealth expected to climb
Which brings us to the effect of household wealth.
Change in the level of household wealth has a significant impact on consumer spending. The oodles of academic research on the issue shows that when wealth increases through a combination of rising asset prices – shares and houses in particular – growth in consumer spending increases.
The effect is quite powerful, with estimates suggesting a 1 per cent rise in wealth adds around 0.1 to 0.15 per cent to spending growth. Australian household wealth has increased by more than 20 per cent over the past two years.
With house prices still strong and the stock market also at record highs, the spectacular rise in wealth will be a key driver of spending over the next 12 to 18 months.
What to expect
The recent RBA Statement on Monetary Policy revealed a forecast of 7 per cent for household consumption growth in 2022, which is double the long-run growth rate. This forecast looks reasonable but with plenty of upside risk.
The dwelling construction boom will lift spending on consumer durables as will considerable pent-up demand for domestic travel, hospitalities, sporting events and the like.
All of this spending feeds into consumer demand, which is certain to be very strong through 2022. The only question is exactly how strong it will be and how this will feed into employment, wages and inflation.
It will probably be the main game for economists and policy makers in 2022.
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