The economy is set to grow further in 2010, but household financial conditions are deteriorating to the extent the nation could experience a W-shaped economic recovery, a report shows.
Melbourne Institute bulletin of economic trends shows the domestic economy is set to grow by 0.8 per cent in the March quarter and by 0.6 per cent in the June, September and December quarters.
But the report’s household financial conditions index fell 16.6 per cent to 28.8 index points in the March quarter of 2010.
It was the first fall in the index after four consecutive quarters of improvement.
More than half of the 14.4 per cent households who consider themselves to be financially stressed, are employed while employed people with a household income of over $80,000 are the most financially stressed out of all income groups.
The report said part of the deterioration in financial conditions was due to the increased need to service household debt, in particular mortgage debt.
‘‘The Reserve Bank is now in a difficult position,’’ The Melbourne Institute’s Edda Claus said in a statement this morning. ‘‘Rises in house prices and associated rises in consumer debt seem to warrant a swift tightening in monetary policy but if the tightening is too fast it may choke-off business investment that is only now starting to recover.
‘‘This means that if the RBA gets policy wrong, Australia may experience a W-shaped recovery.’’
Household financial conditions fell across most states, with Western Australia suffering the biggest fall in conditions at minus 17.7 per cent.
Victorians were next worse off following a 6.9 per cent fall in conditions.
Queensland fell 6.7 per cent and NSW was down 1.9 per cent.
The conditions of South Australian’s improved by 7.8 per cent.
The Bulletin also forecast headline inflation to grow to 2.5 per cent in the March quarter before tapering off later in the year.
In March the central bank took the cash rate to 4 per cent from 3.75 per cent.
It moved rapidly in the final three months of 2009 to lift the interest rate off its 49-year low of 3 per cent with three 25 basis point hikes between October and December.
Current account deficit a worry
The current account deficit, which widened to $17.5 billion the final quarter of 2009, from $14.7 billion in the previous quarter is another source of worry, the Melbourne Institute said.
The deficit was not a concern over the 1980s and 1990s when household savings were positive and governments weren’t running large deficits, the report said.
“However, since the late 1990s foreign funds are also flowing to the household sector as the household savings rate fell to and remained around zero.”
The biggest drain on household savings is the cost of housing, the report concludes.
“Private dwellings provide housing services but are not a ‘productive asset’ in a macroeconomic sense.
“The worry now is that if the savings rate drops back to around zero from its spike during the global financial crisis then foreign money may return to funding a housing boom in Australia.”
'Too bearish'
ICAP economist Adam Carr described the conclusions as “a little too bearish overall.”
“I think there are fewer risks facing the economy and certainly I wouldn't place the current account on my list of concerns," he said. “I'm not sure that people appreciate just how strong growth could be this year.”
AAP, with Chris Zappone, BusinessDay
