• Australia’s household savings rate has almost fallen to zero, which raises doubt about the outlook for domestic consumption.
• However, Macquarie says wording in the RBA minutes suggest the central bank is “sceptical” about the data.
• They said the RBA “don’t really believe the extent and persistence of the weakness in Australian household income growth”.

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Australia’s household savings rate is at a 10-year low of 1%.

It’s notable in the context of falling house prices and low wage growth — two threats to the outlook for domestic consumption, which itself makes up the biggest component of GDP.

Interestingly, Australia’s most recent GDP report — which easily beat forecasts — was driven by a strong lift in consumer spending.

But if Australians are digging further into their hip pocket to to maintain spending levels, it raises doubts about the outlook.

However, Macquarie economists Justin Fabo and Rick Deverell think there may be more to the story.

They started by highlighting the recent divergence between household income and consumption, which is the cause of the dwindling savings rate:

But in reviewing the minutes from the RBA’s latest board meeting, the two said they found evidence which suggests the central bank is “sceptical, or at least puzzled” about household income data.

They pointed to the following passage in the section titled ‘Consideration for Monetary Policy’ (emphasis ours):

Recorded household income growth had been subdued and this continued to be an important source of uncertainty for the outlook for consumption and inflation.

“You know that when the RBA uses terms like ‘recorded’, ‘reported’ or ‘measured’, it has a healthy degree of scepticism about the data being referred to,” the pair said.

Often, that’s because the RBA has access to internal data which may refute the headline number.

“In this case, we think the RBA is saying they don’t really believe the extent and persistence of the weakness in Australian household income growth in recent years, vis-à-vis consumption growth.”

And Fabo and Deverell also have their doubts. They said the household savings rate has been “notorious for hefty revisions” over the years, due to inconsistencies in the data.

As a result, the two are wary of the average disposable income figure which the ABS uses to calculate the savings rate.

Instead they prefer to use a measure which they call “income from working”. The figure combines compensation of employees, and an estimate of labour income from self-employment.

When the “income from working” figure is used, it removes the divergence between income and consumption:

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