Will the consumer crack?
The outlook for Australian consumption is critical here. A few companies are now pointing to some weakness emerging (Universal Stores, Adairs, Wesfarmers). A consumer retreat would be cheered by the RBA which is losing the battle with inflation.
However, a big fall in consumption is no guarantee because there is such underlying strength in the economy. There has been enormous job creation in healthcare, NDIS, aged care, clean energy investment and infrastructure spending. That has meant a record 900,000 jobs generated over the past two years. Much of this continue given extra healthcare spending, higher immigration and ongoing infrastructure spending. Wages growth is also at a ten year high and rising. The second factor is increased household savings. The amount of excess cash accumulated by households is extremely large. We estimate that around $270 billion accumulated during the COVID years. Critically very little of this money has since been drawn down.
The maths on this are not great for a big slowdown. There will be a big drag from higher interest payments that we estimate at around $40 billion. But if wages grow around $80 billion, interest received increases $25 billion and the government pays out $24 billion extra in welfare then household will still be well ahead even before you think about the potential to eat into savings.
All this means that the consumer might be hard to kill and will force the RBA to go harder particularly now that there is accumulating evidence from changing wage and price-setting behaviour that inflation has become embedded.
Chairman and Chief Investment Officer at Bellwether Partners Ltd AFSL 238460
2yHi Tim , all the job growth is government spending, no way they will pull back . RBA likely to continue to raise rates until govt puts their own man into RBA.