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Households face further strain as economy struggles, says former RBA economist Jeremy Lawson

Jeremy Lawson: residential investment contributed about 20 per cent of growth in 2015. Photo: Dominic LorrimerThe n economy will struggle to maintain already lacklustre growth rates next year as the main drivers of expansion in 2015 start to flag, a former senior economist with the Reserve Bank of has warned.
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Standard Life Investments’ chief economist Jeremy Lawson says a decline in housing investment, along with the impact of cooling property prices on household spending, will add to the continuing drag from weak commodity prices and falling resources-related business spending to further slow growth rates.

“If you think about the housing market, residential investment contributed about 20 per cent of the growth that saw in 2015,” he said.

“Forward-looking indicators suggest that that investment is slowing down quite substantially, and it’s not just on the volume side – there are also signs that price growth is levelling off.

“So, without having to forecast an actual drop in n house prices, if you think about the wealth effect and how that tends to operate in , I’m pretty convinced that one of the reasons why household consumption growth has been solid despite weak wage growth is because of that positive wealth effect,” he said.

His comments add to a chorus of economists warning that despite better than expected gross domestic product growth of 2.5 per cent year-on-year in the third quarter, faces a difficult 2016.

and New Zealand Banking group economists Katie Hill and Justin Fabo cautioned this week that the Reserve Bank of ‘s forecasts for household spending “are highly exposed to disappointment”. Squeeze coming

They say entrenched weak wage growth and shrinking national income from falling export prices will further squeeze household budgets, which will crimp spending and so discourage investment by business.

“First, our view is that households are viewing lower income growth as being relatively persistent rather than mostly transitory,” they wrote in a note to clients.

“This is consistent with elevated measures of job insecurity and the drag on income growth from the falling terms of trade.

They said the extent to which consumers would dip into their savings to compensate for the fall in real incomes is “likely to be limited in our view amid much more muted wealth gains”.

“A soft outlook for household spending will also hinder the ability for non-mining business investment to strengthen appreciably,” they wrote

“Together, these account for two-thirds of GDP.” Slow pick-up

Although less downbeat, Barclays’ chief economist for Kieran Davies said this week slowing property price growth would hit sentiment and household consumption, although he argued the health of the job market would prop up incomes and support spending.

“We expect spending to slowly pick up next year on a hiring-driven lift in incomes, as we think wages will stay subdued for some time yet,” he said.

Mr Lawson, meanwhile, argues that with the boost from two cash rate cuts and lower oil prices this year already absorbed, households have run out of support for a lift in spending.

“I think it’s likely that we’ll see disposable income growth slow in 2016,” he said.

“Unless the household savings rate declines, that will mean slower consumption growth.”

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