For the full picture, download the report – Australian Markets Weekly 9 September 2019.

• The Reserve Bank believes the main domestic risk to the outlook is consumer spending, where the bank missed the slump in spending over the past year, which reflected weak incomes and the hit to wealth from the drop in house prices. The bank forecasts a turnaround in spending given lower interest rates and income tax cuts, although their initial impact has been a disappointment given weak retail sales in July.
• Australia’s slow growth in consumer spending per person over the past decade is similar to the experience of other advanced economies, which is surprising given Australia avoided the worst of the global financial crisis. Other countries have also experienced weak spending as households have reduced their gearing. This is something yet to be seen in Australia, where household debt has stabilised, but at an all-time high of 120% of GDP, which is also nearly a world record.
• Adapting work showing high public debt stifles growth, we examined the relationship between household debt and consumer spending across the advanced economies.
  We found that high debt of more than 90% of GDP was associated with weaker growth in spending and spending per capita. This analysis does not guarantee causation, although there is also an association between high debt and weak future growth in spending per capita. Locally, this suggests to us that high debt has played a role in holding back spending, something that should continue given households’ debt-servicing ratios remain high despite the lowest level of mortgage rates in decades.

The week ahead – AU NAB business survey; ECB policy easing; UK election speculation

• In Australia, Tuesday’s NAB Business Survey for August draws on the larger quarterly business survey sample of companies and continues to be closely watched by the RBA. After falling sharply over the past year, business conditions have been relatively stable over recent months and were at a level of 2 in July.
• Internationally, an aggressive easing package is expected at Thursday’s ECB meeting. The consensus expects the deposit rate to be cut by 10bp to ‑0.5% (we expect a larger 20bp cut to -0.6%), tiering of the deposit rate, and a resumption of QE at €30bn a month. The risk is the ECB underwhelms with a split emerging between policy-makers on the need for QE. Given this division, we think the ECB will talk about a new QE programme, but delay the release of specifics and implementation. In the UK, the timing of a possible election dominates given the passage of a bill to extend the Brexit deadline to 31 January 2020 in the event parliament is unable to agree on a Brexit deal by 19 October. Parliament is set to be suspended by Thursday. PM Johnson wants to call an election before 31 October, while the opposition prefers a later date in order to minimise the risk of a no-deal Brexit.

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