Spending continues while sentiment falls, economists say

Commonwealth Bank’s (CBA) consumer and business surveys found that sentiment for Australians with a mortgage fell by 8.9 per cent, compared to a 2.1 per cent fall for those who owned their home outright.

The data came following the Reserve Bank of Australia’s (RBA) fourth consecutive cash rate hike, taking the cash rate to 1.85 per cent.

As the cost of living increases mortgage holders are “feeling the pinch” more than others in August.

Consumer sentiment also fell in August, down a further 3 per cent to just 81.2 pts, which signalled “pessimists continue to outweigh optimists”.

In addition, the survey noted the gap was widening following nine consecutive falls totalling 22.9 per cent fall in sentiment.

Since the peak in April 2021 the index is down by 31.6 per cent. The last time the index has been this low was during the initial phase of COVID‑19, the GFC and the early 1990s recession.

The combination of higher inflation, aggressive interest rate hikes and falling home prices together has contributed to very low levels of sentiment, the report stated.

However, households are still spending money as though they’re optimistic about the future, which is complicating the economic outlook.

CBA economist Stephen Wu said: “We do expect the combination of materially higher mortgage rates, lower home prices, and rising cost of living pressures to put downward pressure on real consumer spending.

“These results suggest a real risk that spending growth could slow more materially from here.
We anticipate softer spending will drive below trend economic growth over 2023.”

Business confidence lifts

On the other hand, National Australia Bank’s (NAB) Business Survey showed a bounce in both business confidence and conditions in July.

In fact, the gap between business confidence and gloomy consumer sentiment is also largest on record.

Despite the “significant headwinds in the economy”, the report found business confidence rose by 5 index points to +7, back above the long-term average.

Belinda Allen, economist at CBA, said business have been optimistic despite the economic conditions.

She said: “Current economic activity is proving resilient and businesses may have become a little more optimistic the economy can withstand the current challenges.

“Consumers are reporting extreme pessimism about the economy, but for now economic activity is holding up which is likely supporting business confidence.”

The report noted profitability had risen (to +17pts) that indicated that businesses are currently able to absorb increased input prices in part by passing these costs on to customers.

Ms Allen said: “How long this can persist before demand begins to fall is a key uncertainty for the economy.”

Diana Mousina, a senior economist at AMP Capital, indicated businesses had been able to push some of their rising costs onto customers without hurting their profits in recent months, but that situation may not last for much longer.

“While businesses have so far been able to pass on higher prices to consumers, this can’t last as consumer spending power has been hit from rate rises and high inflation,” Ms Mousina said.

“Also, while selling prices have risen, purchase and labour costs are rising faster which indicates some potential margin pressure for firms.

“As consumer spending volumes decline (which is just starting now), business confidence and conditions should also fall.”

In addition, as home prices have fallen since the start of the year, house price expectations also took a dip falling 7.5 per cent in the month and were down by 37.7 per cent over the year.

[Related: Housing values tipped to sink 15% by 2023s end]