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:

1. 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.
2. 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.
3. 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.

Source: 1. The federal budget shows Australia’s net migration intake will fall sharply — but some say it’s outside the government’s control

Source: Reproduced with permission of Fidelity Australia. This article was originally published at https://www.fidelity.com.au/insights/investment-articles/time-is-up-for-the-resilient-consumer/
This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity Australia’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.
© 2023. FIL Responsible Entity (Australia) Limited.
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.