CBA economists share outlook
Discretionary spending decreased across several sectors in June and is expected to contract further as monetary stimulus unwinds and interest rates rise.
That’s according to economists at Australia’s biggest bank, who expect several challenges to consumer discretionary spending over the coming months, due to rising interest rates, the cost-of-living, and negative real wages growth.
The CommBank Household Spending Intentions Index rose 0.9% in June to 117.3 pts, up 11.9% year-on-year. But there was clear evidence of weaker discretionary spending following recent interest rate hikes, CBA said.
The monthly rise was mainly driven by the increased cost of goods and higher spending in the transport, education, and household services sectors, the bank said.
Australians returning to the office resulted in a big uptick in transport spending, up 6.7% in June, driven by higher fuel costs and increased use of public transport, car parks, taxis, and childcare services. Transport spending was up 132.2% year on year, but CBA noted spending was well below pre-pandemic levels.
Elevated demand for work clothing spurred an increase in spending at department stores and on dry cleaning and tailoring.
Read more: Australia’s biggest bank explains fixed rate rise
CBA chief economist Stephen Halmarick (pictured above) said Australian consumers collectively spent more than a year ago, as the economy recovered from the lockdowns in 2021.
“However the index’s modest gain in June was narrowly based, driven mainly by the increased price of many goods and services, such as petrol, which helped drive higher spending on transport, along with increased spending on education and household services,” Halmarick said.
Recent official cash rate hikes and the resulting increase in market interest rates were clearly reflected in sectors more sensitive to interest rate rises, he said. Discretionary spending on entertainment, home buying and retail all declined during the month.
“With further interest rate increases expected through the remainder of 2022, we would expect to see discretionary spending weaken further in coming months,” Halmarick said.
Read more: CBA provides free internet to approved customers
CBA senior economist Belinda Allen (pictured above) said in the current economic environment, it was difficult to isolate which factor would be the major driver of weaker discretionary spending.
“… we can see from internally generated CBA credit and debit card data that early May was a turning point for spending growth. And this aligns with the start of the hiking cycle by the Reserve Bank of Australia,” Allen said.
The June Household Spending Intentions Index already showed signs of a slowdown in spending on entertainment, retail, and home buying, and it was likely the slowdown would reach other sectors, she said.
“We would expect these sectors to continue to weaken and broaden into other categories - in particular, household goods will be impacted by falling home prices and reduced turnover in the housing market,” Allen said.
The official cash rate increased by 50 basis points in July, taking it to 1.35%. This followed a 50 basis point increase in June and a 25 basis point increase in May.
CBA is forecasting a 25 basis point hike in August, and additional increases over the coming months, taking the official cash rate target to 2.1% by the end of this year.
