Teflon-coated consumer spending won't last

Teflon-coated consumer spending won’t last

Recognition:Jo Benke

Household consumption accounts for about two-thirds of domestic demand and was a key driver of strong economic growth in the June quarter.

More recent National Accounts figures have not yet been released, but it seems that shoppers continued to spend at a decent rate, with retail spending up a healthy 2.3 percent in the September quarter (although admittedly a significant part of that was due to inflation) . higher prices).

This solid spending may come as a surprise given that official interest rates have risen from 0.1 percent to 2.85 percent since May as the Reserve Bank has sought to stem rising inflation.

Markets believe RBA Governor Philip Lowe is likely to hike rates again next month to 3.1 percent, which would be the eighth straight rate hike this year, on top of the worst inflation in three decades. Will that finally take the wind out of household spending in the summer holiday season?

The market will be watching closely, with Westpac chief economist Matthew Hassan calling festive spending a “litmus test” for the economy.

“It might be the last hooray before we tighten our belts as there have been quite a few missed Christmas holidays over the last few years,” he says. “Or it could be that we close the hatches if we get a pre-Christmas rate hike.”

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But even if consumers continue to spend happily over Christmas and the New Year, economists are convinced that a slowdown is on the way in 2023. Why are you so confident?

The main reason for this is that interest rate movements take a long time to affect the real economy. Financial markets react almost immediately to any change in the interest rate outlook, and house prices react promptly as well, as rising interest rates cause banks to cut lending to homebuyers.

However, banks typically take months to adjust customers’ mortgage repayments, meaning most borrowers are still a long way from feeling the full impact of higher rates. There are also an unusual number of people with ultra-cheap fixed rate loans who don’t feel the sting until their fixed term expires and switch to a higher rate (most of these loans expire in the next two years). ).

So it may take time, but higher interest rates will inevitably force many people to cut spending. As the newest of the RBA Monetary Policy Statement explained, the interest payments by households on loans are higher than their interest income on deposits, so that disposable income is increasingly squeezed.

Although surveys repeatedly show that consumer confidence has slipped to recessionary levels, retail spending has been almost Teflon and has remained fairly resilient.

Household cash flows are also feeling the effects of inflation, as prices are rising much faster than incomes.

However, what makes this time so uncertain is that various other economic forces are working in exactly the opposite direction, allowing us to spend more.

First, many households are still sitting on large wealth gains, including an estimated $250 billion in bank deposits amassed during the pandemic.

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Second, there was a job bonanza. The unemployment rate is close to a 50-year low and companies are complaining about a serious shortage of skilled workers. As a result, many people are likely confident of keeping their job, even as they worry about the ailing economy.

Finally, there’s clearly catching up to do on experiences we’ve been denied for the past two summers, such as: B. Holidays at home or abroad, as reflected in Qantas’ record profit increase this week.

All of these forces may keep consumer spending going for a while, but logic tells you they can’t do so indefinitely.

Eventually, the reality of sharply higher mortgage payments and inflation will catch up with household budgets, and spending will have to be cut somewhere. Because of this, economists are predicting that 2023 will be a much slower year than 2022.

Ross Gittins is on vacation

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