Consumption growth will lag income gains

Households appear to be taking advantage of recent strong income gains to strengthen their finances. Over the past year, real incomes increased by 3.0% but real consumption increased by just 1.4%. (See Chart 1.) Reflecting this, the household saving rate picked up to 1.7%, from 1.3%. We forecast consumer spending growth to accelerate, but we think that it will continue to lag income growth. The still-low saving rate and the weak tone of the business surveys suggests that households will try to build their liquid savings in order to better cope with a potential negative income shock. Although house price inflation looks set to pick up from recent low rates, stretched valuations mean that there is little scope for a sustained period of strong gains that boost spending through positive wealth effects. Overall, we forecast consumer spending growth to average 1.4% over the next four quarters. While that would be better than the 0.5% annualised gain in the second quarter, it would be 1%-point lower than the average for the past five years.