It’s evident that the Australian consumer is under pressure. It appears the tailwinds that helped brand the consumer as ‘resilient’ are now turning into headwinds.
Think of it like a rubber band: household budgets are being stretched tight and at the moment, the band is withstanding the pressure. So how long can it really hold at these extreme levels before it snaps?
Growth is slow, inflation is sticky
It feels like we’re at a point where the probability of Australia heading into a recession has lessened. However, what is looking more certain is that growth is slowing, and inflation is sticky.
Let’s look at what is happening to the three-speed economy within inflation:
- Discretionary goods: clothing, household goods, recreation
Inflation peaked here a while ago and has since trended down to near zero, which is good news. The bad news however is that it comprises only a quarter of the Consumer Price Index (CPI) basket. - Essential goods: food and beverages
Here, inflation is flattening out but is still above the Reserve Bank of Australia (RBA)’s target band. Again, this is good news but it too only comprises a quarter of the CPI basket. - Essential services: transport, insurance, housing
That leaves our third sector where inflation is trending very high and isn’t showing signs of slowing. Atop this trend, it comprises half of the CPI basket. So, what’s driving this?
The number one input into essential services is wages and in Australia, wage growth is very high. Over the past 16 months, the labour force in Australia has seen the number of job advertisements declining. In June 2024, this figure was down 17.6% year on year.
Usually, you’d expect to see this flow through to a rise in unemployment figures, but what we’re hearing is that companies are doing their best to retain employees (at a more affordable salary) to combat the wage price spiral. Some companies are effectively hoarding their labour, but things can change very quickly, which could see job cuts going forward.
Pandemic savings are drying up
During Covid, we saw many grow their wealth in savings. However, due to factors including the cost-of-living, most of this is now largely depleted and the rate of saving has fallen below what it was pre-Covid.
The Commonwealth Bank released some data breaking down the growth in savings balances by different age cohorts. Interestingly, it showed that people over 55 years old were the only group seeing their savings balances still grow. The younger the age group, the quicker the decline. This understandably is resulting in the youngest age groups cutting their spending as they spend more on their mortgages and day-to-day living costs increase.
Halt on migration
The final tailwind under pressure is migration. Typically, migrants are reasonably big spenders as they are often starting from scratch so face a lot of set up costs (homes, cars, etc.). We’ve heard recently from politicians on both sides discussing the planned cuts to migration. Australia’s net migration intake, which is currently around half a million, is set to drop 50% by 20261. This will have a significant impact on spending in the economy.
The consumer is under pressure, and while resilient to date, as household budgets keep getting stretched tight, eventually something has to give.
