Household savings predicted to keep declining

Australians are expected to dig further into their savings this year as they increase their spending faster than their income is growing, according to the head of Treasury.

Treasury Secretary Phil Gaetjens shared the forecast with senators at an estimates hearing in Canberra on Wednesday.

Gaetjens noted the number of Australians with jobs is rising, helping people to feel more optimistic about the economy.

However, he said wage growth and inflation continued to be subdued.

Incomes are expected to pick-up gradually, leading to more spending, which Gaetjens said should provide a boost to economic growth.

But he doesn't think income growth will keep up with people's spending this financial year.

"As growth in consumption is likely to continue to outpace income growth in 2018-19, the household saving rate is expected to decline further," he said.

His comments come after national accounts data released in September showed Australia's household savings rate fell to 1.0 per cent in the June quarter, down from 1.6 per cent in the three months to March and 2.5 per cent from last June.

That came as the Australian economy had grown at its fastest pace in nearly six years, expanding by 3.4 per cent over the 12 months to June.

Gaetjens said the drought is among the greatest risks to the domestic economy at the moment, due to its likely impact on the agricultural sector.

Tightening credit conditions - which make it more challenging for people to get loans - may also constrain how much people spend and invest, he said.

Looking beyond Australia, Gaetjens said Treasury was keeping a keen eye on increasing uncertainty and unpredictability in trade policy.

Such tensions, stemming from trade tariffs imposed by the United States, recently contributed to the International Monetary Fund lowering its growth forecast for this year.

"The potential for further escalation remains and this could negatively impact global growth, especially if confidence is affected," the Treasury boss said.

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