The strength of consumer spending before Christmas has many economists scratching their heads.
Inflation has soared and the record-breaking run of interest rate hikes that have followed are squeezing families – mortgage, grocery and power bills have risen by hundreds of dollars.
However, households continue to splurge on everything from new clothes to holidays at rates that aren’t just supporting economic growth, but driving it.
The trend was evident on Wednesday, when Australian Bureau of Statistics figures for the September quarter showed the volume of household spending rose by a brisk 1.1 per cent, surprising experts who predicted interest rate rises and inflation would start to stymie shoppers.
EY chief economist Cherelle Murphy said the “mighty Australian consumer” powered through the September quarter, adding another $3.2 billion to the Australian economy over the period.
Meanwhile, more recent figures from Australia Post revealed the recent Black Friday and Cyber Monday shopping holidays in late November broke new records for online shopping.
Spending growth was up 3 per cent on last year’s record-breaking cyber sales weekend, with an astonishing 4.9 million households shopping online during the last two weeks of November.
‘Driving the economy’
Indeed APAC economist Callam Pickering said such strong spending in the face of the cost-of-living squeeze is unprecedented in modern Australian history – he has never seen anything like it.
“Household spending growth remains pretty strong, particularly at this point of the economic cycle,” Mr Pickering said.
“[Spending] is really the only thing driving the Australian economy right now, the [COVID] recovery is almost purely a household affair.”
Resilience in the household sector is being watched closely by the Reserve Bank too, which will decide how high to raise interest rates next year based on how shoppers digest its efforts so far.
If such strong spending persists over Christmas and into 2023, then economists expect the RBA will have little choice but to push through even tougher increases in mortgage bills in response.
Pent-up demand
The ongoing strength of consumer spending is surprising economists, but that doesn’t mean there aren’t plenty of explanations behind the big spending.
Economist Nicki Hutley pointed to several factors, including the long tail of pent-up demand after COVID, which has been particularly evident in spending on services like travel and hospitality.
Australia Post’s cyber weekend data also pointed to strength in clothing sales, with athleisure goods proving to be very popular bargains.
Ms Hutley said that the Morrison government’s stimulus-heavy March budget, which included billions of dollars in stimulus through 2021-22 tax returns, has supported more spending.
“We had the last of the middle income tax-offset and the fuel tax excise cut, all of those things would have helped [boost consumption],” Ms Hutley said.
Another factor to keep in mind is that while the RBA’s interest rate rises since May have broken records with their consistency, they haven’t actually flowed through to many home owners yet.
Almost half of the mortgage market fixed their rate during the pandemic, meaning many won’t be squeezed until their loans revert to market prices over the next few years.
Retail expert and Queensland University of Technology professor Gary Mortimer said that strong retail spending over the November shopping holidays is also part of a broader trend that’s seen Christmas shopping increasingly happen earlier in the year.
However, he said physical retailers will also benefit over December as consumers head back to the shops following the online shopping holidays in November.
“In the last three or four years people have been concerned about deliveries, and certainly even a year ago Australia Post was warning about a slow down,” Mr Mortimer said.
“People were conditioned to shop earlier and earlier.”
‘Reckoning’ looms
Looking forward, economists say the trajectory of consumer spending will be the single most important factor influencing how high inflation rises next year, and by extension, interest rates.
Ms Murphy and other experts agree, however, that spending will inevitably fall in the New Year.
We’ve started to see signs of a slowdown with retail spending declining in October and household consumption, although still robust, was lower than the June quarter as revealed in Wednesday’s data.
“Borrowers, subjected to 3 percentage points of rate hikes in eight months, have experienced the fastest rate of tightening since inflation targeting began in the early 1990s,” Ms Murphy said.
“When combined with higher prices – especially for basics like energy and food – along with real wages falling and house prices declining, the only profile for consumption is a softer one.
“The day of reckoning is coming.”
