The “cautious consumer” meme

Is the media deliberately obtuse? Following Myer’s complete wipeout, there’s a universal chorus of “cautious consumers” being the problem. It’s the weather, it’s the banks, it’s rate rises, it’s your grandmother’s cat.

The problem with this “cautious consumers” line is that it implies a choice. The Australian shopper has apparently elected not to buy.

Well, this blogger is sorry, but it’s wrong. The Australian consumer cannot afford to buy and you better get used to it.

In last week’s Statement on Monetary Policy, the RBA said the following about its forecasts, which will determine interest rate levels:

The outlook for consumption and the timing of the pick-up in resource sector investment are two other important influences on the outlook. The household saving ratio is forecast to remain broadly unchanged over the forecast period, after having increased significantly since the mid 2000s. There are, however, plausible scenarios in which the saving ratio increases further, and others in which it declines. On investment, while confidence in the broad outlook has increased, the exact timing and scale of projects remain difficult to forecast. Given the size of the large projects, changes in timing can have a material effect on the quarterly profile of aggregate demand and GDP.

The household savings ratio that the RBA is referring to is below:

In short, the RBA is on hold so long as the ratio stays where it is: High. That clearly implies that if it falls, and consumption rises, rates will also rise.

Consumers can choose to spend more if they like, and they’ll get hammered on their mortgages if they do. What a bargain!

Glenn Stevens warned Australians about further debt accumulation mid last year. The people are being compelled to listen, even if the media won’t.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. Even though it’s not the only factor, the late winter had a huge effect on garment purchases. Since pretty much all clothes are made overseas, shops are forced to make decision on what to stock 3 months in advance, and it’s hard to sell summer clothes when the weather is 20 degrees.

    Furthermore, consumer confidence went down 5.7% due to the flooding, even in area outside Queensland.

    JB Hi-Fi is still doing brisk business, so people are still buying, but only if it’s money for value.

  2. I’m not saying the one-off’s didn’t have an effect, but they’re happening amidst a structural shift that is clear as day and has been happening for a year at least. If you can point to one MSM article acknowledging it, I’ll doff my hat..this was not the first downgrade by Myer.

    JB’s same store sales tanked, despite a kick-ass category killing model and management. But their growth is already priced in…

  3. People like buying, in fact they’re addicted to it. Just think about it… shopping is even considered to be recreational!

    So, when people aren’t buying that’s a clear indicator that something is wrong. Hell, there are indicators left, right and center something is wrong. Manufacturing is now in its fifth month of recession, retail is down, housing is slowing down more and more… Maybe you can think of some very original arguments to explain a single indicator but there is only one to explain them all:

    Aussie economy is toast. Nice job on delaying the GFC peeps.

  4. I was going to rack up $3K on the credit card today. But it’s raining, so I’ll stay home and watch torrented avi’s of The Muppets instead.

    Seriously, retail is a dud investment sector and it will be squeezed from both ends of the demographic spectrum for a long time. Harry S Dent’s work on the relationship between demographics and consumer spending is quite enlightening, and although Australia has better social security and government sponsored healthcare we’re still in for a wave of boomer retirees tighening their belts.

    At the other end of the demographic spectrum young families are spending more disposible household income on mortgage repayments than ever and even if this bubble pops (I think unlikely, but ya never know) younger people will suffer higher unemployment and lower real wage growth from the fallout. In this world I don’t see retail or the businesses up the supply chain that rely on it as a good bet.

    The retail CEO’s can only blame one-offs for so long before they have to acknowledge the obvious structural shift.

    • threedogsandakid

      Oops. “Not deliberately”

      JB’S are often cited as an example of a retailer doing well. Perhaps because they largely target a younger market. From kids with dollars to spend to young workers and young professionals, those that have no mortgage and quite possibly, no hope (or have given up hope) of getting one. So what to do with those spare dollars – spend on entertainment, computers and gadgetry. Hence JB’s do better than more traditional department stores. These young consumers don’t have to kit out a house, upgrade the sofa, and, certainly the younger ones, are not even that interested in fashion brand names (unlike their parents who would not dare attend a weekend BBQ without Billabong or Quiksilver plastered all over them).

      And you are exactly right about consumers with mortgages. Now reluctant to draw down on the mortgage or credit card for discretionary purchases, uncertain as to the direction of interest rates, and finally realising that the easy money train is over.

      Websites promoting simplicity and minimalism (eg Zen Habits) are flourishing. There is a very real shift in consumer habits taking place – “Do we really need another ……” The consumer is saying “No”.

      • there are more and more young people (most of them professional) that don’t want to buy a property. Many of them could afford but they ask simple question: why?
        It is cheper to rent, you can afford much better place to live in, you are free of debt stress, and very flexible to change job or even city

      • I wish I could believe this is happening. It would be great if humanity somehow weaned itself of materialism as a way to gain status but I just don’t think we’re quite there yet.

        The simplest explanation is usually the correct one… people simply do not have the money anymore because they are struggling to pay mortgage interest*, expensive groceries, energy bills, etc.

        (*sarcasm-mode: forget about paying off the mortgage… that’s so 90’s).

        • threedogsandakid

          Those with mortgages don’t have the money to spend anymore. Certainly not since deciding not to milk the equity in their homes or max out the credit card (this is probably happening simply to make ends meet). If you are paying off a $300k+ mortgage, you have no money to spare.

          The sense of wealth created by ever-increasing home prices has dissipated. Kaput. Finito. Gone. And it’s not coming back. That combined with the spectre of rising interest rates and an uncertain global economy are the harbingers of, at best a plateau, and more likely, a significant correction in the housing market.

          For these consumers the endless spend is over. No money. No more.

          But I am saying that those not in that position, in the main younger with jobs, do have some discretionary spending ability and are choosing to spend on communications/entertainment at JB’s and Apple Stores. Don’t think Harvey Norman are getting the bulk of this spend, the atmosphere and hard sell in their stores is simple old-fashioned. And they are not buying up big in department stores.

          Finally, I do think we are seeing the tentative beginnings of a less consumerist world. A rising realisation that you can only have so much ‘stuff’. Beyond the a certain point all that ‘stuff’ turns into crap!


          ps AnonNL

          “(*sarcasm-mode: forget about paying off the mortgage… that’s so 90′s).”

          so true, now its Debt ’til Death!

          • True, we are dinky’s and are probably in a more comfortable position financially than most people. However, we refuse to buy a house at current prices. We’re happily renting and saving a lot of money.

            We do not go on a spending spree exactly because of the reason you gave. No need to keep buying stuff you don’t need! It’s such a waste and empty reward.

            I still don’t think this explains what’s going on in retail but yes I agree that many young people are not willing to take on a ridiculous mortgage anymore.

  5. Frankly, I love how this is such a surprise to so many. The economy has been labouring fot an extended period….. under the weight of interest rate increases (big thanks to the majors, btw), the end of fiscal stimulus (which made up more than it’s fair share of GDP), and a booming currency. Lord help us if the Chinese economy (inevitably) slows as tightening bites. We don’t seem to have a lot else at this point. We’ve had a central bank firmly calling a floor in inflation of 2.75pc, and economists agreeing like lapdogs, only for it to continue dropping like a stone. Core hasn’t risen ONCE in yoy terms in more than 2yrs, and this claptrap has been perpetuated for a long time now, despite all the signs to the contrary. Perhaps the RBA can be excused… a powerful public body with the ability to shape sentiment, jawboning can often be a useful tool, but which opens it up to the very criticism I level at them: TOO SLOW to recognise emerging (even well progressed) trends. But my real disdain is saved for wood duck economists, some of whom are still saying strong everything is! And who now talk of price pressures based on food prices etc as if it’s a good to aim demand mgmt macro policy at a (volatile) supply event, and who seem not to have studied how this sort of boneheadedness only a few decades ago can result in extremely sub optimal outcomes. Give me a break! Did anyone (too few, clearly) ever ask WHY retail and credit growth were so damn low in the context of a 5pc u-rate? Clearly there is more than enough capacity in the labour mkt when you add in the UNDERemployed, and those extended by debt. Why is inflation falling in the capital cities?

    Ahh….breathe out…..