The Big Picture: Australian household balance sheets looking strong

The Reserve Bank’s recent Financial Stability Review highlighted in no uncertain terms that Australian household balance sheets are in strong shape. First there is household saving which has stabilised near 10% of income, “well above the average over the past 20 years”.

Then there is the general reluctance by households to borrow. According to the RBA: “Household credit growth has been slower in the past five years – at an average annual rate of around 5.5% – than in the 20 years prior, when it averaged around 13.5%.”

And while interest rates have fallen sharply in recent years, many households have chosen to pay off home loans at a faster rate, rather than reduce repayments and increase spending. The RBA estimates: “households’ mortgage buffers are equivalent to around 20 months of scheduled repayments (principal plus interest) at current interest rates” providing scope for borrowers to meet repayments if they lose their jobs or face a reduction of income.

And a combination of rising savings and modest increases in share prices and house prices have boosted real wealth per household by around 3.5% over the past year.

If households maintain this behaviour clearly they will be well placed to meet the challenge of higher interest rates when they come either later this year or early in 2014.

The week ahead

In Australia, the highlight in the coming week is likely to be the March jobs data, released on Thursday. Meanwhile Chinese economic data is also in focus early in the week. In contrast, the key US economic data is not released until Friday.

In Australia, the week kicks off with the ANZ data on job advertisements. In the past these figures would have been instructive about the health of the job market. But nowadays employers use a range of other tools and services to secure the workers they need rather than putting job ads in the newspaper.

Tomorrow, the latest data on “people flows” is released. More precisely the data is “Overseas Arrivals and Departures” from the Bureau of Statistics, detailing figures on tourist arrivals and departures as well as longer-term migrant flows. While the good news is that tourist arrivals are at record highs, Australians are also jetting abroad in record numbers, reducing spending in key tourism regions.

Also tomorrow, the NAB business survey is issued. Consumers have become more confident about their finances and the broader economy but the mood of businesses hasn’t really improved. That could change with this March survey.

On Wednesday, Westpac and the Melbourne Institute release the April consumer confidence figures. Sentiment has lifted almost 11% over the past three months, arguably in response to stable interest rate settings. Another lift in sentiment can’t be ruled out.

Also on Wednesday, the Reserve Bank’s assistant governor (economic), Christopher Kent, delivers a speech to the Bloomberg Economic Summit. At some point the RBA will start dropping hints about removing the “easing bias” – the policy leaning in favour of rate cuts – so speeches from RBA officials must be closely watched.

And on Thursday the March jobs data is released. This economic data is keenly awaited as last month’s figures showed employment soaring by over 70,000 with the jobless rate entrenched at 5.4%. While there is the risk employment will partially retreat, we tip a modest 5,000 lift in jobs, slightly lower participation rate and jobless rate of 5.4%.

In the US, the week gets off to a slow start with only the Chicago Midwest index and Employment index scheduled for release on Monday. Federal Reserve chief, Ben Bernanke, also delivers a speech.

And the economic heat doesn’t rise much on Tuesday with only data on wholesale sales and inventories slated for release alongside usual weekly data on chain store sales.

On Wednesday, the Federal Reserve releases minutes of the last policy-making meeting held over March 19 and 20. These minutes should provide valuable insights about how Fed members are viewing the current economic recovery as well as the discussion on when stimulus measures should be wound back.

Also on Wednesday, the monthly Budget data is released together with weekly home loan figures.

And on Thursday the weekly data on claims for unemployment insurance are released together with import and export prices.

On Friday, the wait is over for investors with ‘top shelf’ economic data to be issued. Data on producer prices (PPI or business inflation) is due together with retail sales and consumer sentiment.

Economists expect a benign 0.2% rise in the core PPI (excludes food and energy). And after robust retail spending in February, economists expect a more subdued 0.2% lift in March sales (up 0.1% if car sales are excluded.) Federal Reserve chief, Ben Bernanke, also delivers another speech on Friday.

In China, inflation data is issued on Tuesday with readings on both producer and consumer prices expected. Finance data such as money supply and new yuan lending data are slated for release between March 10 and 15. And on Wednesday, the March trade data is expected with a slightly expanded surplus expected.

Sharemarket, interest rates, currencies and commodities

The US earnings season (profit-reporting season) gets underway in the coming week. And as is traditional, Alcoa kicks off proceedings by releasing its results on Monday. But while share prices posted solid gains over the first three months of the year, corporate earnings are expected to have been more subdued.

According to FactSet, earnings in the first quarter may be 0.7% lower than a year ago. And of those companies providing earnings guidance, to date only around a quarter have suggested that profits will be higher than originally envisaged. Other estimates suggests that earnings of the companies in the S&P 500 index will be down 3-4% on a year ago with the biggest drags coming from the Finance and Technology sectors.

You are either a gold bug or you’re not. That is, you embrace gold enthusiastically and closely follow the latest research or you tend to stick with traditional investments like shares or property.

Still, if you are a gold bug, the last 12 years have been very favourable with the gold price rising each year over the period and averaging gains of almost 15% a year. But so far this year, gold has proven to be an underperformer with the price falling by around 7%. Fears of a collapse of the eurozone have receded and investors have been keen to buy equities rather than “safe-haven” assets. While weak gold production and rising purchases by Chinese and Indian buyers will support prices, the question is whether this offsets a drop in “safe haven” purchases.

Craig James is chief economist at CommSec.