5th June 2006 
 
Despite the strength of the Australian dollar, which is expected to hold around 75 US cents over the year ahead and with a booming commodities and export market, it is expected that consumer spending will remain sub-par under the weight of higher interest rates and the debt overhang, record petrol prices and a softening labour market, said Economist for Westpac Jonathan Cavenagh at the Chartered Accountants Business Forum in Canberra today.  
 
"From 2002 - 2004 spending was above income levels as consumers used their homes as ATMs, by borrowing against their equity to fund consumption. 2005 saw consumer spending reach a low point and in 2006, it is expected that there will still be no dramatic improvement in consumer spending," Mr Cavenagh said.  
 
"Now consumers financial assets have taken a sharp upward turn due to money pouring into superannuation and managed funds, these however are not driving factors for consumer spending, the way housing equity was, as it is harder to utilise financial wealth to fund consumption," he said.  
 
While the Federal Budget delivered some much-needed tax relief; higher interest rates, increased petrol prices and the debt overhang are factors that would be enough to offset most of the stimulus from the tax cuts announced in May.  
 
"Effectively what has occurred is that the rise in interest rates and petrol prices has taken money out of the consumer pocket with one hand and delivered back to the consumer with the other hand in the form of tax relief," Mr Mr Cavenagh said.  
 
"The current spike in petrol prices is not expected to continue, but it is expected that, assuming there is no increase in demand, that the additional cost to consumer's household budget will be $2.5B over the course of the coming year," he said.  
 
However, in a relatively competitive retail market, it is expected that the cost of petrol will not translate into the cost of consumables," he said.  
 
The impact of the rate rise has affected the housing market especially in Sydney, where affordability is the lowest out of any capital city in the country. It is probable that the housing market will experience further weakness in the wake of the RBA interest rate rise in May. House prices are expected to remain flat, at best, in real terms over the course of the next cycle.  
 
"Consumer spending is wedged in at 3% and will growth in line with household income growth throughout the rest of the year. Housing approvals are expected to fall by around 5% and the housing sector will remain a drag on the economy, particularly for NSW," Mr Cavenagh said.  
 
With domestic demand not expected to accelerate, employment growth is likely to ease further to around 1% by the middle of 2006. This will put upward pressure on the unemployment rate but it will maintain a 5% handle. Wages growth will remain solid and hence supportive of consumer spending.  
 
"Despite the unfavourable outlook for consumer spending and the housing sector, Australia is still experiencing a robust economy with an above par global growth that has gone from a housing boom, to a strong commodities price boom, cheaper capital imports and relatively high capacity utilisation as business investment punches above its weight," Mr Cavenagh said.