What do the latest consumer spending insights tell us?
In July, the Commonwealth Bank of Australia (ASX:CBA) published its inaugural monthly household spending insights (HSI) Index, replacing the superseded ‘intentions’ index. Based on online, Bpay, debit, and credit card transaction data, the insights are indeed comprehensive, coming from the bank’s seven million customers. Contrast that with a typical report or survey of a few thousand customers! This report, drawn from de-identified payments data, offers valuable insights into spending trends, and it has revealed a tightening of consumer belts with a decline in spending growth nationally to a modest 1.3 per cent in the year leading up to July.
The weakest annual change in spending growth was observed in Victoria, perhaps reflecting Melbourne’s deteriorating status as a destination for work.
Remembering the central role of consumer spending in the Australian economy (consumer spending constitutes the largest segment of the economy) it will be worth watching this index. It is also the case the method of construction has recently been updated, and the index is now constructed from data across 12 spending categories, distinguishing between goods and services, retail, and non-retail, as well as essential and discretionary expenditures.
The report’s accuracy and reliability are also supported by the alignment of the Commonwealth Bank of Australia’s payment data with the Australian Bureau of Statistics (ABS) spending categories, census-weighting for national representation, and seasonally adjusted measurements. It paints a comprehensive picture of consumer behaviour and trends in spending activity.
Notably, the report reflects the impact of the Reserve Bank of Australia’s (RBA) interest rate increases, with a slowdown evident in household spending. The 12 rate increases of a cumulative 400 basis points has led to a noticeable decline in the household spending growth rate, plummeting from its peak of 18.2 per cent in August 2022 (influenced by the COVID re-opening of course) to 1.3 per cent in July this year.
The Commonwealth Bank of Australia’s data reveals a notable shift in household spending patterns. While non-essential purchases like clothing and appliances seem to be on the decline, households are still reserving a portion of their budget for memorable experiences. This trend is evident as spending on recreation, which has risen by 7.1 per cent over the past year.
As we have reported here on the blog previously, recreation spending has largely been driven by robust growth in online travel bookings, commercial airlines, cruise lines, and travel agency reservations.
A remarkable surge in consumer interest was observed in the entertainment sector. Specifically, spending at cinemas saw an astonishing spike of 65 per cent in the month leading up to July. This surge was fuelled by the simultaneous and highly anticipated cinema debuts of Barbie and Oppenheimer, an event now affectionately dubbed “Barbenheimer.”
As an aside Carsales (ASX:CAR) reported a sharp jump in searches for pink cars. Carsales noted it has experienced a nearly 40 per cent spike in pink car searches during July with the Toyota Yaris, Fiat 500 and Mitsubishi Mirage (all Barbie-approved) being the top three.
Despite the upswing in recreational spending, essential items have seen more pronounced growth compared to discretionary goods and services over the previous year. Spending on insurance experienced a notable uptick of 13.2 per cent in the year leading to July. This increase was driven by higher premiums for home, motor vehicle, and health insurance.
It is likely insurers have been increasing premiums to claw back losses from bushfires, floods, and other disasters.
Moreover, there have been evident shifts in education spending. Private school fee hikes contributed to a nine per cent increase in education spending over the last 12 months, while purchases related to health, such as visits to doctors and dentists, have jumped eight per cent.
The Commonwealth Bank of Australia expects a further weakening of household spending throughout the remainder of 2023 and in 2024, noting a restrictive monetary policy stance, the lagged effects of the Reserve Bank of Australia’s (RBA) interest rate increases to date and the higher refinancing obligations tied to fixed-rate mortgages rolling over to variable.
Notwithstanding the index is produced by a bank with its own self-interests to consider, I expect the RBA will be paying attention to the results as it clearly reflects an immediate and powerful influence from interest rate fluctuations on consumer behaviour, further emphasising the importance of well-informed monetary policy.
The report also notes regional variations in spending patterns across Australia. South Australia experienced the strongest month-on-month growth in household spending in July at 1.9 per cent, followed closely by Victoria and New South Wales, both with 1.7 per cent growth. In contrast, the Northern Territory had a comparatively muted growth rate of 0.1 per cent, while Queensland was flat.
Over the past 12 months, Western Australia, South Australia, and the Northern Territory showed the strongest household spending growth, while Victoria exhibited the weakest growth rate, declining by 0.3 per cent. It is likely that the more heavily indebted status of Victorians (higher house prices and, therefore larger mortgages) is a contributor. The data indicates that consumers there are reducing spending on discretionary items to accommodate housing and inflation-related pressures.
It’s perhaps not an overstatement to suggest the Commonwealth Bank of Australia’s HSI Index’s dynamic, and up-to-date representation of consumer behaviour, bridges a gap between ‘Wall Street and ‘Main Street’. Underscoring the report’s findings of challenges faced by consumers in states with high housing costs and inflation rates, the Commonwealth Bank of Australia suggests that the RBA may now halt rate hikes and even cut rates by one percentage point next year.
The Montgomery Fund and The Montgomery [Private] Fund own shares in Commonwealth Bank. This blog was prepared 18th of August 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.