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Household wealth crashes – retail sales to suffer

Australia’s average household wealth is plunging as a result of the combination of higher prices (inflation), increased costs (interest rates and payments) and declining house prices. Latest data shows a steep fall in household wealth and points to the major impact being on discretionary and deferable retail expenditure.

In the December quarter of 2022, household wealth fell a reported $A57.4 billion or 0.4%. The data indicates that small gains in superannuation accounts were more than offset by the steep falls in the value of housing. Read elsewhere in Stats Count for more on that topic.

As we look at the chart below – it’s the key point about household wealth – we are moving beyond a discussion about household incomes. This is the household balance sheet, a thing that ought to be positive and for which we would like to see consistent and stable growth, for the most part.

As household wealth deteriorates, confidence dissipates.

As Matthew Elmas wrote in The New Daily in March:

“That’s because of what’s known as the ‘wealth effect’ – where households become less confident as their wealth erodes and so spend less on big ticket items such as vehicles.”

This is very important when we consider the drivers of retail sales because it underscores the difference between households acquiring assets (cars, furniture, boats, jet skis and so on) and essentials. The wealth effect will see sales of household assets decline.

In that context, when we examine retail sales, we can see they were up 1.9% in January, after a decline in December of 4.0%. The increase is welcome, but to be frank, its not significant and no more than may have been hoped.

It may be that the economy is already seeing the wealth effect play out. As the chart below shows, total retail expenditure growth is now well ahead of that for a couple of discretionary and asset sectors of interest to the forestry and wood products industries.

In January, sales of furniture and floor coverings were 0.3% lower than the prior month, for instance. Hardware and building supplies were down 0.1%.

Perhaps at the household level we will know if we are feeling wealthy based on what we contemplate buying? Or perhaps, its yet more complex than that.

Posted Date: March 30, 2023

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