Interest rates weaken household spending, latest data reveals

A series of 11 cash rate hikes within just over a year is starting to take its toll on household spending in Australia, as indicated by the latest data.

Household spending data showed a modest increase of 3.3 per cent over the year leading up to May 2023, according to the Australian Bureau of Statistics (ABS), weighed by household services and non-discretionary expenses.

The data for May revealed that household services experienced a significant rise of 7.2 per cent, primarily driven by increased spending on transport and catering services.

However, spending on goods fell by 0.9 per cent during the same period.

Furthermore, non-discretionary spending saw a 6.9 per cent increase, fueled by expenditures on food, transport services, and catering.

Conversely, discretionary spending experienced a decline of 0.6 per cent, attributed to reduced purchases of goods related to recreation, culture, and furniture.

These figures take into account the Reserve Bank of Australia’s (RBA) 10th cash rate hike in May, bringing it to 3.85 per cent and coincide with the Commonwealth Bank of Australia’s (CBA) Household Spending Intentions (HSI) data for May.

However, the CBA’s June data for household spending revealed a decline of 1.7 per cent for the month, causing the HSI Index to drop to 116 points.

The main contributing factors to this decline were home buying intentions, which fell by 26.2 per cent in June due to a decrease in home loan applications, influenced by higher interest rates.

CBA’s chief economist, Stephen Halmarick, explained that home buying intentions have been volatile throughout 2023, likely due to the substantial increase in interest rates, limited housing stock availability, and rising prices.

The June data incorporated a 25-bp increase, bringing the cash rate to an 11-year high of 4.1 per cent.

Mr Halmarick further noted: “Monetary policy in Australia is highly restrictive and further softness in household spending can be expected in the coming months.

“Given the lags involved with monetary policy, financial conditions are expected to continue to tighten for many Australian households well into 2024.”

Notably, home buying intentions also decreased in other sectors such as health and fitness (down 5.6 per cent), entertainment (down 5.4 per cent), travel (down 2.5 per cent), and retail spending (down 0.6 per cent).

Meanwhile, household services saw a 3.1 per cent increase due to high energy prices.

As the central bank endeavours to manage rising inflation, a slowdown in household spending could weigh on the next monetary policy decision in August.

Mr Halmarick predicts a final rate hike in August, bringing the cash rate to 4.35 per cent.

While CBA economists have accurately estimated recent cash rate movements, other economists maintained their stance on a peak cash rate of around 4.6 per cent.

‘Modest lift’ to consumer sentiment

Given the rising cost of living and mortgage debt shadowing Australians, consumer sentiment remains at “deeply pessimistic levels”, according to ‘Westpac-MI Consumer Sentiment July’.

The index experienced a significant decline of 17 per cent during the first half of 2022 and has since remained within the very weak 78–86 range.

Despite the “depressingly low consumer sentiment” levels, July saw a slight upward trend, chief economist at Westpac, Bill Evans, said.

Mr Evans highlighted that the marginal increase in sentiment this month is likely due to the reported easing in the ABS monthly inflation indicator, as inflation is closely linked to cost-of-living pressures.

However, the decision by the RBA to pause in July did not have a significant impact on confidence.

In fact, sentiment was considerably more positive ahead of the RBA decision, with an index read of 88, up 11.2 per cent on June.

Given consumers expect more rate hikes on the horizon, sentiment remains “hawkish” on the future economic outlook.

[Related: Major bank agree cash rate peak is 4.6 per cent]