Saturday, 21 January 2012

Household Incomes - About to Get a Boost?

In the next little while, there are a few factors that will by themselves provide a boost to household incomes.  The most obvious is the boost from lower interest rates.  Already, most retail rates have been cut by 50 basis points or more which will free up cash flows for the still heavily indebted household sector.  There will be a small offset to this from the lower interest income on household savings but this is no big deal compared to the savings for borrowers.

And with more interest rate cuts coming, the cash flow for the household sector is about to get plenty of support.

There is also an imminent boost to household income from the Government compensation and tax changes that are being funding from the carbon price.  There’s around $500 million a month that will be paid to the household sector in the form of tax cuts or pension payment increases over and above any automatic pension increases.  If recent history is any guide, around 90% of this will be spent.

What’s more, the flood levy, which from memory raised around $1.75 billion in 2011-12, ends on 30 June.  For the medium to high income earners who paid this levy, there will be a material boost to take home pay by around $150 million a month.

All of which adds up to show that a mix of lower interest rates, tax cuts, pension rises and the end of the temporary flood levy will boost household income.

Of course there are some offsets to this otherwise rosy outlook.

Importantly, the slack labour market with fewer people employed means lower household incomes.  If you don't have a job, you don't earn any income.  Slower wages growth also crimps income growth.   These labour market issues will be the critical factor determining the extent of the interest rate cutting cycle and in a slightly circular argument, changes in household incomes and cash flows.

Inflation will also take away some of the household income boost.  We know there will be a 0.7% increase in the cost of living from the carbon price, so part of the compensation is merely a transfer – in effect – to cover the rise in prices that will come from the larger polluting companies.  Regular inflation, if we can call it that, should run at between 2 and 3% at an annual rate which will also account for some of the income boost.

The medium term outlook therefore shows some boost to household income to offset the problems from a weak labour market. 

For a good guide on just how this elaborate interplay of factors is impacting on the household sector, it will be important to look at retail sales, consumer sentiment, credit growth, loan arrears, motor vehicle sales and on a quarterly basis, most obviously household consumption.  Most of these indicators are weak at the moment, but there are reasons to be hopeful for an uptick during 2012-13.

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