By Claire Reilly

SYDNEY, NSW: Retailers are doing it tough with consumers spending less, but hopes for a return to the spending boom of the pre-GFC economic climate might be unrealistic according to the governor of the Reserve Bank of Australia, Glenn Stevens.

In a speech yesterday, Stevens noted that consumers are “mostly unhappy” at the moment.

“Measures of confidence are down and there is an evident sense of caution among households,” he said. “It seems to have intensified over the past few months.”

“The natural disasters in the summer clearly had an effect on confidence. Interest rates, or intense speculation about how they might change, are said to have had an impact on confidence,” he added.

“Increasingly bitter political debates over various issues are said by some to have played a role as well. The global outlook does seem more clouded due to the events in Europe and the United States.”

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Stevens said that for ten years between 1995 and 2005, consumption growth outpaced income growth, while “the flow of saving fell as a share of income”. But, he added, this boon was bound to end.

“From about the end of 2007, even as income was speeding up, household consumption spending slowed down. In per capita terms, real consumption today is no higher than three years ago,” he said.

“It's no wonder that people are talking about consumer caution, and no wonder that retailers are finding things very tough indeed.

“It's not that the income is not there, it's that people are choosing, for whatever reason, not to spend it in the same way as they might have a few years ago.”

Stevens said that the GFC was largely to blame for the reassessment of savings patterns by consumers.

“An international financial crisis that envelops several major countries, which has excessive borrowing by households at its heart…is an event that would be likely to prompt, if nothing else did, a reassessment by Australian households of the earlier trends.”

As a result, everyday household consumption habits have changed from the giddy highs of 1995 to 2005 – a shift from confident behaviour to conservative.

Stevens noted that the current economic expansion has been characterised by investment in the resources boom (which has flowed on to other sectors of the economy), and not by “very strong growth in areas like household consumption that had featured prominently in the preceding period”.

Stevens conceded that the “good old days” of consumption growth of the 1995‑2005 period might not be seen again. However, he noted that there was still hope to be had.

“It is entirely possible that, were some of the current raft of uncertainties to lessen, the mood could lift noticeably, so I don't think we need to be totally gloomy.

“Everything comes back to productivity. It always does,” he said. “The thing that Australia has perhaps rarely done, but that would, if we could manage it, really capitalise on our recent good fortune, would be to lift productivity performance while the terms of trade are high.

“The income results of that would, over time, provide the most secure base for strong increases in living standards. That sort of an environment would be one in which the cautious consumer might feel inclined towards well-based optimism, and re-open the purse strings.”