Australians still spend record amounts of money, but polls show this could change rapidly as rising interest rates send consumer confidence to pandemic lows.
Key points:
- Consumer confidence has fallen to the lows normally observed during recessions
- Rising inflation and the sudden jump in interest rates to combat it are weighing on households
- The fall in confidence has yet to feed into the reduction in spending, with several measures at historic highs
The latest consumer spending data from the Australian Bureau of Statistics show that household spending was 7.9% higher in May than a year earlier.
Much of the increase in spending is not because Australians need to buy much more, but it reflects rising inflation, which means people pay much more for most things they buy. .
Transportation spending increased by nearly 15 percent, as people flew back into the sky, but also as the cost of fuel increased.
Both eating out and going out also saw a double-digit increase in spending over the past year as pandemic restrictions eased and people had more confidence to go out.
But transportation and hospitality remained the two areas of household spending that had yet to recover to pre-pandemic levels (January 2020), while spending across the economy was around 10% higher than before COVID-19 arrived in Australia.
ABS data collected from the transaction records of major banks show that spending is about 10% above pre-pandemic levels. (Supplied with: ABS)
A separate monthly index from the Commonwealth Bank, which combines its internal data on Australians ’consumption habits with internet search trends, found that spending intentions remain around record levels.
Reading the household spending intentions index for June at 117.3 was an equal record high, up 11.9 percent from a year ago.
But increases were mainly concentrated in transportation (again reflecting rising fuel prices), as well as in education and home services.
CBA chief economist Stephen Halmarick said there was already evidence that households were cutting back on other areas.
“Interest-sensitive sectors of the economy are beginning to show clearly the impact of recent Reserve Bank interest rate hikes, with discretionary spending on entertainment, home buying and retail all decreasing during the month, ”he said.
“With further increases in expected interest rates for the rest of 2022, we expect discretionary spending to weaken further in the coming months.”
CBA economists expect the official RBA cash rate to rise further from the current 1.35% to 2.1% by the end of this year, which will lead to more economic growth. slow and a forecast of a 15% drop from the maximum to the minimum of house prices at the end. next year.
Confidence falls to recessive levels
The prospect of further rises in interest rates and falling house prices has shattered consumer confidence, which is approaching the pandemic lows observed during the initial blockades from March to April 2020.
Westpac and the Melbourne Institute’s long-running and widely observed consumer sentiment index fell another 3% to 83.8, well below the 100-point level indicated when optimists are equal to pessimists. .
Westpac chief economist Bill Evans said confidence has fallen every month this year and is at levels that had previously only been seen during recessions or other major economic disruptions over the past few decades.
“The index has fallen by 19.7 percent since December 2021, a precipitous fall comparable to the two-month fall during COVID (-20.8 percent); and the half-yearly falls observed in the face of the crisis global recession (-29.7 percent), the recession of the early 1990s (-20.5%), the mid-1980s recession (-23.8%), and the recession of the early 1980s (-18.8%), “he noted.
“Answers to our quarterly questions highlighted the clear factors of weak sentiment, with the most memorable news around inflation: around 60% of respondents recalled news on this topic compared to an average long-term 12%.
“Other prominent news areas were ‘domestic economy’ (43% record); interest rates (24%) and ‘international conditions’ (23%).”
The ANZ and Roy Morgan Consumer Confidence Weekly Survey paints a very similar picture, with a deeply pessimistic reading of 81.6.
The ANZ-Roy Morgan consumer confidence index has not been so low since the early stages of the pandemic in March / April 2020. (Supplied by: ANZ / Roy Morgan)
The RBA will have to take a “more prudent approach”
This index fell 2.5% more in a week in which the Reserve Bank raised interest rates by 50 basis points for the second consecutive month.
ANZ senior economist Felicity Emmett says the recent drop in confidence has been overwhelmingly driven by people with mortgages. (ABC News: John Gunn)
“The rise in the RBA’s 50 basis point rates last week influenced sentiment, with a drop in confidence for people paying a mortgage at a strong 5.4 per cent,” the economist said senior ANZ Felicity Emmett.
“This continues the trend set since the end of April, when the high inflation report for the March quarter advanced expectations of rising interest rates. Since then, confidence among mortgage holders has fallen by 25%, while tenant confidence has fallen by only 4%.
Undoubtedly, borrowers who are making mortgage repayments increasingly important were a major factor in the fall in household valuations on their “current financial conditions” to near-pandemic levels, with the impact of the pandemic. Rising consumer prices also weigh on family budgets.
Household assessments of their current financial condition are close to the deep lows observed in the initial pandemic blockages nationwide. (Supplied by: ANZ / Roy Morgan)
With rising inflation expectations (most consumers expect the average price to rise above 6 percent over the next year) and rates expected to rise further, it’s no surprise that households ’views on their financial position next year will also deteriorate.
The ANZ-Roy Morgan survey shows Australians are almost as pessimistic about their home finances a year earlier as they were at the start of the pandemic. (Supplied by: ANZ / Roy Morgan)
AMP senior economist Diana Mousina also noted the sharp drop in spending intentions.
AMP Capital senior economist Diana Mousina says confidence is not yet at accident-like levels … (ABC News: Billy Cooper)
“The ‘time to buy household items’ index fell further in July, to its lowest level since the GFC, which is not a good sign for short-term discretionary retail spending.” he said.
“The intention of the RBA when it comes to raising interest rates is to curb domestic economic growth to reduce inflation, but in a way that does not place the economy. [yet]. “
Evans said this heavy weight in consumer confidence should pause to think about the Reserve Bank after what he expects to be another 50 basis point cash rate hike next month.
“The cash rate has risen at a faster rate than we have seen in any cycle since 1994 and this is clearly unsettling for consumers who are also facing a sharp rise in the cost of living,” he noted. .
“A more prudent approach will be appropriate once the policy has moved to ‘neutral’ in August.
“We stand up and wait [Reserve] The bank will stop to assess conditions, both national and global, before moving rates to the contracting area later in the cycle. “
Posted 7 hours, 7 hours ago, Tuesday, July 12, 2022 at 3:29 AM, updated 6 hours ago, 6 hours ago, Tuesday, July 12, 2022 at 4:32 AM