Statement on Monetary Policy – February 2025Box B: Consumption and Income Since the Pandemic

Following strong growth early in the pandemic, household disposable income has declined in recent years …

Real household disposable income per capita – a broad measure of income – is around 1 per cent lower than prior to the pandemic (Graph B.1). This has been among the weakest periods of real income growth since the 1960s and has occurred alongside a period of historically weak productivity outcomes. While the RBA typically focuses on aggregate outcomes as these are most relevant to the balance of supply and demand in the economy, this Box focuses on developments on a per capita basis as these provide a clearer illustration of how household consumption has evolved at the household level.^[1]

Real labour income has grown over the past five years, but this has been more than offset by lower income from other sources, higher interest rates and higher tax payable. The largest component of household income – labour income – has contributed around 4 percentage points to per capita household income growth since December 2019, after accounting for inflation. While growth in real base wages has been weak over this period, labour income has been supported by other forms of compensation (e.g. promotions and bonuses), as well as switches to higher paying jobs and an increase to the employment-to-population ratio. However, the combined drag from higher interest rates, lower gross mixed income (mainly small business income) and tax has reduced disposable income by 5 percentage points since December 2019; most of the increase in tax payable in recent years reflects the strong growth in labour income. Gross mixed income per capita is lower than prior to the pandemic (after accounting for inflation), which may partly reflect the continuation of a downward trend that began in the second half of the 2010s.

Relative to what was reported a year ago, the level of household income from around early 2021 has been revised higher. Revisions to data are common as more information becomes available and, in this case, the revisions lifted disposable income per capita by around 2 per cent over the past few years. However, the trends over this period were little changed, with the decline in real incomes starting in late 2021 in both vintages of the data.

… and has weighed on household consumption.

After rebounding strongly in both 2020 and 2022 as pandemic-related restrictions were eased, consumption growth has been soft over the past couple of years and the level has declined in per capita terms. This weak growth has been driven by the weakness in household disposable income discussed above, the impact of which on consumption has more than offset the impact of the 25 per cent increase in real wealth since the start of the pandemic.

The revised consumption data suggest that it took longer for households to adjust their spending patterns following the decline in incomes (compared with the data available a year ago). These revisions were material, lifting the level of household consumption per capita by up to 2 per cent over the past couple of years. The cumulative size of the revisions over the past year are towards the upper end of the historical range. The current data suggest the consecutive declines in per capita consumption started from mid-2023 and accelerated through 2024 (Graph B.2). By contrast, data available at the time of the February 2024 Statement suggested per capita consumption started to decline earlier, in late 2022. The gross savings ratio was also revised downward, indicating that households were reducing saving to smooth their consumption through 2023 to a greater extent than previously apparent. The savings ratio in 2024 was a little higher than what was expected a year ago.

The recovery in consumption has occurred more slowly than expected.

The expected timing of the anticipated pick-up in consumption has been pushed out since late 2023 as noted in the November 2024 Statement.^[2] Household income per capita stabilised from late 2023 but consumption per capita continued to decline through to the September quarter of 2024, in contrast to earlier expectations that it would also stabilise over this period. The underlying cause of these weaker-than-expected outcomes for consumption growth is difficult to determine but could possibly reflect an increase in precautionary savings motives as the persistence of weakness in income growth has become more apparent over time. While data in the December quarter of 2024 suggest that the recovery in consumption is now underway, this reassessment of the historical data has contributed to our judgement that some of the recent acceleration will be temporary, and that growth momentum will slow a little in the first half of 2025 (see Chapter 3: Outlook).

Endnotes

The experience of individual households can differ substantially from these per capita figures. See Beckers B, A Clarke, A Gao, M James and R Morgan (2024), ‘Developments in Income and Consumption Across Household Groups’, RBA Bulletin, January. [1]

See RBA (2024), ‘Box D: Annual Review of the Forecasts’, Statement on Monetary Policy, November. [2]