Australian consumer spending is slowing as RBA interest rate hikes | So Good News
Domestic consumption accounts for two-thirds of household consumption, and was the main driver of economic growth in June.
The latest national accounts numbers have not yet been released, but it appears that consumers continue to spend more, with retailers spending a whopping 2.3 percent in September (although admittedly, this was good because inflation has risen. rising prices).
The hard currency may come as a surprise when you consider that interest rates have fallen from 0.1 percent to 2.85 percent since May as the Reserve Bank tried to curb inflation.
Markets think RBA governor Philip Lowe is likely to raise rates again to 3.1 percent next month, which would be the eighth consecutive hike this year, on top of the biggest drop in inflation in three decades. Will that put an end to household spending during the summer holidays?
It will be closely watched by the market, with Westpac economist Matthew Hassan describing the use of festivals as a “litmus test” for the economy.
“It would be a last hurray before we buckle down, as there have been a number of missed Christmas holidays over the last few years,” he says. “Or it could be, if we raise the price before Christmas, we’re going to drop the ropes.”
Although consumers continue to spend happily during the Christmas and New Year period, economists believe that in the year 2023 things will slow down.
The main reason is that interest rate movements take a long time to affect the real economy. Financial markets react immediately to any change in interest rates, and housing prices respond quickly as rising prices cause banks to reduce the amount they can lend to buyers.
But banks often take months to adjust a customer’s mortgage, which means many borrowers are still a long way from feeling the effects of higher rates. There are also a lot of people who have very low-cost loans that will not feel the pain until their fixed period is over, and they continue to reach higher rates (most of these loans will expire in the next two years. ).
So it may take time, but higher interest rates will force many people to cut back on their spending. Like the RBA’s latest Statement on Monetary Policy As we have explained, households’ interest on loans is higher than their interest on deposits, so disposable income is gradually reduced.
Despite surveys showing again and again that consumer confidence has plummeted, retail investment has been like Teflon and has remained resilient.
Household income density also decreases due to inflation, with prices rising faster than income.
What makes this an uncertain time, however, is that other economic forces are working in a different way, allowing us to spend more.
First, many families still took a huge hit to their wealth, including the $250 billion in bank deposits that were hoarded by the pandemic.
Second, there will be a job bonanza. The unemployment rate is near a 50-year low and businesses are grappling with a severe skills shortage. As a result, many people have the confidence to keep their jobs, even if they are worried about the economic downturn.
Finally, there is a gradual demand for what we have been denied for the past two summers, such as domestic or international holidays, as reflected in this week’s profit increase from Qantas.
All of these forces may keep consumer spending moving fast for a while, but common sense tells you that they won’t be able to do so forever.
Ultimately, the reality of higher mortgage payments and rising prices will weigh on household budgets, and spending will have to be cut back somewhere. This is why economists are predicting that 2023 will be less than 2022.
Ross Gittins is on vacation
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