Rising interest rates push household finances to pandemic lows

Michael Janda* says households are preparing for the toughest times since the start of the pandemic as confidence plunges.

Australians are still spending record amounts of money, but surveys show that could change quickly as interest rate hikes propel consumer confidence to pandemic lows.

The latest consumer spending data from the Australian Bureau of Statistics shows household spending was 7.9% higher in May than it was a year earlier.

Much of the increase in spending is not because Australians are necessarily buying a lot more, but is a reflection of soaring inflation, which means people are paying a lot more for most things they buy.

Spending on transportation increased by almost 15% as people got back on their feet, but also as fuel prices soared.

Dining out and going out also saw double-digit increases in percentage spending over the past year as pandemic-related restrictions eased and people became more confident about going out.

But transport and hospitality remained the two areas of household spending that had yet to recover to pre-pandemic (January 2020) levels, while economy-wide spending was down. around 10% higher than before COVID-19 hit Australia.

A separate monthly index from the Commonwealth Bank, which combines its internal data on Australians’ spending habits with internet search trends, found that spending intentions remain around record highs.

The June household spending intentions index of 117.3 was an even record and up 11.9% from a year ago.

But the increases were concentrated mainly in transport (again reflecting higher fuel prices), as well as in education and household services.

The ABC’s chief economist, Stephen Halmarick, said there was already evidence that households were reducing their activities in other areas.

“Interest rate sensitive sectors of the economy are clearly starting to show the impact of recent Reserve Bank interest rate hikes, with discretionary spending on entertainment, home buying and retail all declining over the month,” he said.

“With further interest rate hikes expected through the end of 2022, we expect to see discretionary spending weaken further in the months ahead.”

ABC economists expect the RBA’s official exchange rate to rise from the current 1.35% to 2.1% by the end of this year, leading to slower economic growth and a projected 15% drop from peak to trough in house prices by the end of next year.

Confidence falls to recessionary levels

The prospect of further interest rate hikes and further house price declines has rattled consumer confidence, which is approaching pandemic lows seen during the first lockdowns of March-April 2020.

Westpac and the Melbourne Institute’s long-running and widely watched consumer confidence index fell another 3% to 83.8, well below the 100-point level that indicates when optimists equal pessimists.

Westpac chief economist Bill Evans said confidence had fallen every month this year and was at levels previously seen only during recessions or other major economic disruptions in recent decades.

“The index has now fallen 19.7% since December 2021, a precipitous fall comparable to the two-month fall during COVID (-20.8%); and the half-year declines seen before the global financial crisis (-29.7%); the recession of the early 1990s (-20.5 percent); the mid-1980s recession (-23.8 percent); and the recession of the early 1980s (-18.8%),” he noted.

“Responses to our quarterly questions highlighted the clear drivers of weakening sentiment, the most recalled information regarding inflation – around 60% of respondents recalled information on this topic, compared to an average at long term by 12%.

“Other notable news topics were ‘the national economy’ (43% recall); interest rate (24 percent); and “international conditions” (23%). »

The weekly consumer confidence survey from ANZ and Roy Morgan paints a very similar picture, with a deeply pessimistic reading of 81.6.

RBA to take ‘more cautious approach’

This index fell another 2.5% in a week when the Reserve Bank raised interest rates by 50 basis points for the second consecutive month.

“The RBA’s 50 basis point rate hike last week weighed on sentiment as confidence among people paying down a mortgage fell 5.4%,” said Felicity Emmett, senior economist at ANZ. .

“This continues the trend in place since late April, when March’s high quarter inflation report brought forward rate hike expectations.

“Since then, mortgage holder confidence has fallen 25%, while renter confidence is down only 4%.”

There’s no doubt that borrowers making ever-larger mortgage payments have been a major factor in pushing household assessments of their “current financial situations” down to near-pandemic lows, the impact of the surge consumer prices also weighing on household budgets.

With inflation expectations rising – most consumers expect average price increases of more than 6% over the next year – and rates set to rise further, it’s no surprise that the Households’ opinion of their financial situation next year is also deteriorating.

AMP Senior Economist Diana Mousina also noted the sharp decline in spending intentions.

“The Time to Buy Index for major consumer household items fell further in July to its lowest level since the GFC, which is not a good sign for discretionary retail spending in the short term,” he said. she declared.

“The RBA’s intention in raising interest rates is to slow national economic growth to reduce inflation, but in a way that does not collapse the economy.

Confidence numbers are not close to crash levels [yet].”

Mr Evans said this heavy toll on consumer confidence should give the Reserve Bank pause after what he expects will be another 50 basis point increase in cash rates next month.

“The cash rate has risen at a faster rate than we have seen in any cycle since 1994 and that is clearly troubling for consumers also facing a steep rise in the cost of living,” he said. he noted.

“A more cautious approach will be appropriate once the policy shifts to ‘neutral’ in August.

“We advocate and expect [Reserve] The Bank will pause to assess conditions, both domestic and global, before moving rates into the contraction zone later in the cycle. »

*Michael Janda is the ABC’s online business reporter.

This article first appeared on abc.net.au.

Stephen V. Lee