Have we seen the consumption nadir?
Back in June 24, the picture for Australian consumers was ominously darkening. While Australia’s major lenders had reported only modest increases in mortgage defaults and house repossessions, data from the Australian Securities and Investment Commission (ASIC) revealed Australia was on track to record the highest number of collapsed businesses in ten years, with businesses in the building game and in food services bearing the brunt of the impact from consumers ‘zipping up their wallets’.
According to ASIC, accommodation and food services businesses were folding in 2024 at more than twice the rate experienced in 2022.
Meanwhile, the relatively benign increase in housing loan defaults reported by Australia’s major lenders belied the fact that home loan repayments are the last thing consumers will cut, prioritising primary needs such as a roof over one’s head and food on the table.
Those benign defaults were therefore a lagging indicator, disguising cost-of-living pressure being felt by consumers more broadly.
Elsewhere, ASIC revealed almost half of the nearly six million adults with debt in Australia are struggling to meet repayments, while financial comparison website, Finder, revealed almost 40 per cent of respondents with a household income of more than $100,000 had less than a month’s worth of savings on which they could live.
Since June however have conditions improved or deteriorated?
Providing some answers to that question are the results of a survey by wealth management group UBS, of 1,000 adult Australian consumers. Their investigation revealed Australian consumers are navigating the challenges of rising living costs with a cautious but resilient approach to spending.
The quarterly survey, conducted between 6 and 23 August 2024, revealed spending expectations remain generally positive, albeit slightly less so than in June for middle and lower-income earners.
Despite Finder’s June revelations about diminished savings among higher-income earners, those surveyed by UBS earning above A$150,000 annually were found to be leading consumer spending. Meanwhile, those earning A$60,000 to 150,000, whom UBS described as middle-income earners, and low-income (below A$60,000) households have more materially reduced their spending.
Overall, however, UBS describes the spending outlook as relatively stable, thanks in part to rising incomes and steady household debts. UBS also noted more Australians are expressing a desire to save, possibly reflecting heightened concerns about future economic conditions.
With rising costs being felt across all income brackets, consumers are adjusting their spending habits by focusing on essentials such as groceries, utilities, fuel, insurance, and rent. Indeed, spending on essential categories has surged since June, as Australians prioritise needs over wants.
But perhaps surprisingly, while the rising cost of groceries, utilities, and fuel has prompted many consumers to cut back on discretionary items, spending on home improvement, clothing, travel, and electronics, is experiencing an improvement.
UBS suggests that after a significant downturn in discretionary spending intentions earlier this year, a turning point may have been reached, with many Australians showing tentative interest in these categories.
Notably, home improvement spending intentions are reportedly seeing a significant uptick, especially among low and middle-income earners. Additionally, domestic and international travel is also on the rise, with 68 per cent of respondents planning to fund their trips through savings.
Other findings by the UBS survey include a noticeable shift towards private label food and liquor products as well as larger pack sizes in liquor, indicating that many are trading down to more cost-effective options. Lower-priced retailers, like Kmart, are benefiting from consumers trading down in apparel and general merchandise, though spending on clothing and footwear remains resilient among younger shoppers – those who don’t have a mortgage or live at home and therefore don’t have rental obligations.
Understandably, purchases of larger, more expensive (‘big ticket’) items have slowed. UBS appear to have reached this conclusion from examining the results of major retailers like Harvey Norman (ASX:HVN) and The Good Guys, the latter owned by JB Hi-Fi (ASX:JBH).
It’s worth keeping in mind that higher interest rates have benefitted older Australians who own their own home and have cash in term deposits. The Reserve Bank of Australia’s (RBA) moves to raise interest rates have improved the income-earning power of many retired baby boomers. We have previously reported CBA credit card spending data that revealed the baby boomer cohort was the one group increasing their spending over the previous year.
Meanwhile, online shopping is facing some headwinds, with spending intentions still in decline for the next 12 months, though at a slower rate.
As long as employment remains resilient and people keep their jobs, we won’t see a broad improvement in spending until the RBA cuts interest rates or wages increase meaningfully. Until then cost of living pressures could reasonably be expected to remain a significant concern throughout the rest of the year.
I would note tax cuts and end-of-year sales such as Black Friday, Christmas and Boxing Day may help retailers, but the question remains whether total spending during these events beats their 2023 totals.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
