Aussies Suffer an Electric Shock That Hurts Like a Rate Increase

  • Power bills weigh on finances as RBA frets over consumption
  • Citigroup estimates income drag equivalent to 25bp rate hike

Australian households are already struggling with the killer combination of record low wage growth and record high household debt. Now, there is another headache on the way. Electricity prices are expected to rise. Bloomberg's Michael Heath reports on 'Bloomberg Daybreak: Australia.' (Source: Bloomberg)

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Sydney charity St Vincent de Paul handed out A$600,000 ($477,000) of vouchers last month to low-income earners struggling to pay their energy bills -- five times the average of a year earlier.

And the winter bills aren’t even in the mail yet.

“The depth of need seems to only be increasing,” said Jack de Groot, head of St Vincent’s for New South Wales. “We hear very sad, difficult choices people make as they struggle to keep the balance between rent and energy in winter. Do they use blankets and no energy, or as little as possible?”

Electricity prices are forecast to rise by as much as 20 percent through June next year for almost 90 percent of the population, according to Citigroup Inc. That’s after costs already more than doubled in the decade through 2016. The bank estimates the coming hit to household income will be equivalent to a quarter-point interest-rate increase.

“This impact may be larger if companies are successful in passing through their increase in electricity costs,” Citigroup analysts said in a report this month. “While harder to quantify, this impact could easily double the drag.”

The growing strain on household finances from soaring energy costs opens a new front in the income squeeze faced by Australians already struggling with record-low wage growth and record private debt. The central bank is fretting that households will pull back on consumption, which accounts for almost 60 percent of gross domestic product, as they juggle loans and utility bills.

Reserve Bank of Australia Governor Philip Lowe last week acknowledged the central bank will have to carefully calibrate any future rate hikes to account for household debt at 190 percent of income, among the world’s highest. Rates are currently at an all-time low of 1.5 percent and markets expect the tightening cycle to begin in the second half of 2018.

Behind the soaring energy costs are higher gas prices and the closure of coal-fired power plants. An uncertain policy environment hasn’t helped, leading to a lack of investment into new generators. The rising prices are also becoming an impediment to firms pushing ahead with investment the economy urgently needs to achieve the RBA’s forecast growth.

“It’s affecting investment decisions in other parts of the economy, because businesses aren’t sure about the future price of electricity,” Lowe told a parliamentary panel last week. Higher prices are also hitting “lower income households who spend a disproportionately high share of their income on electricity. It’s crimping their budgets and having an effect on consumption.”

Fiona Guthrie of Financial Counselling Australia said people are increasingly calling her helplines because they can’t afford to pay their higher energy bills. Disconnections are rising and there’s a serious human cost.

“People are having to choose between heating and eating,” Guthrie said. “Kids miss out on essential things because their parents just don’t have enough money to pay the bills. It’s incredibly distressing for these people.”

While household bills accelerate, their incomes remain stagnant: wage growth climbed only 1.9 percent in the 12 months through June, holding at a record low. Still, the economy is generating more full-time work following a period of high underemployment, which the central bank hopes will buttress incomes.

“Wage growth has slowed by more than productivity growth,” Lowe said last week. “The consequence of that is that the share of national income that is going to capital is at a five-decade high and the share going to labor is at a five-decade low.”

On the business side, retailers and consumer goods companies face a pincer movement from rising power prices: they’ll be hit with higher operating costs from their electricity usage, while households may well reduce their own intake given the impact of energy costs on budgets.

Real estate firm Stockland said Wednesday that rising electricity costs at its malls and shopping centers are curbing profit growth. That followed a similar warning from Shopping Centres Australasia Property Group, which expects annual power expenses to rise 30 percent across its portfolio. Mining companies are also heavy users of electricity.

While Citigroup expects electricity price increases to add 0.2-0.3 percentage point to headline inflation in the third quarter, it doesn’t forecast spill overs into core consumer price growth. Given the RBA focuses on underlying inflation that shaves off the largest price increases, there’s unlikely to be a monetary policy response.

That makes scant difference to diners at the Eat and Greet food hub in suburban Melbourne, where volunteers serve meals to those struggling to make ends meet, including people recently made redundant, retirees and working families. Manager Chris Mountford said demand for food suddenly more than tripled over one week in July.

“Something happened to change the dynamic,” she said, noting that the surge coincided with the arrival of the latest electricity bills.

— With assistance by Garfield Clinton Reynolds

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