Westpac: Aussie consumer buckling

Via Westpac’s superb Red Book:

― Our CSI± composite combines subindexes tracking views on ‘family fi nances’ and ‘time to buy a major item’ with the Westpac Consumer Risk Aversion Index and provides a good guide to spending with a lead of about 6mths. ― CSI± fell 2.4% from 90.7 in Oct to 88.5 in Jan, the lowest read since Sep 2017. The index remains a long way below its long run average (–14pts) and is pointing to per capita spending falling about 1%yr. With population growth at 1.6%yr that implies aggregate spending growth of just 0.5%yr, well below the current 2.5%yr. Note that the index has been a less reliable guide to spending in recent years.

― The Q3 national accounts provided another weak update on the consumer, spending undershooting expectations, real disposable income essentially fl at and a further decline in new savings pointing to vulnerability going forward.

― Consumer spending rose just 0.3%, annual growth slowing to 2.5% and the 6mth annualised pace dipping to 2.3%. Spending continues to track a choppy quarterly path, making it difficult to tell how much of the Q3 weakness is a sustained shift. The biggest downside surprises were around services and fuel, some of the latter likely to reverse following more recent declines in petrol prices.

― Weak incomes meant the rise in spending was again partially ‘funded’ by lower savings – the savings rate falling from an upwardly revised 2.8% in Q2 to 2.4% in Q3, a post GFC low. This highlights clear vulnerabilities going forward given risks around potential wealth eff ects (see p16).

― Most partials suggest weakness has carried into Q4. Retail sales rose 0.3% in Oct and 0.4% in Nov but CPI data suggests much of this was due to higher prices rather than volumes. Anecdotes suggest Christmas sales were weak with consumer sector responses to the NAB business surveys also showing a sharp weakening late in the year. However the AiG PSI was more ‘mixed’ than weak’.

― Overall, developments over the last 3mths have prompted us to mark down our 2019 and 2020 forecasts for growth in consumer spending – from 2.8%yr to 2.4%yr. Downside risks continue to dominate.

― Australian household balance sheets are seeing significant shifts that are likely to restrain demand in coming years and are a key risk to the domestic outlook. In particular, a prospective ‘wealth effect’ drag on demand stemming from the decline in house prices is a major area of uncertainty.

― The flow-on impact on spending and saving is also uncertain with evidence from previous cycles mixed; few precedents in which price declines have occurred without wider macroeconomic or interest rate cycles; and little evidence of a major positive effect during the upturn.

― On this last point, one aspect that we have highlighted is the diff erence in balance sheets and savings trends by state. With the current price cycle heavily concentrated in Sydney and Melbourne, any wealth eff ects should only show through in NSW and Vic.

― State data shows gross savings rates have declined by about 1.7ppts in these states over the last year. That conditions our base case view that this apparent positive wealth effect will reverse over the next 2yrs. Given no change in other states, this would see the savings rate nationally rise 1ppt by Dec 2020, constraining spending growth to 2.4%yr.

― The chart and table below show the base case trajectory for the savings rate and the corresponding outlook for consumption growth and present several alternative scenarios including: ‘no change’ (akin to the RBA’s view of essentially no wealth eff ect); a more pronounced rise in the savings rate of 2ppts; and a sharp rise scenario of +3ppts.

― Consumption projections are all on the basis of no other changes to household incomes or payments (e.g. stemming from interest rate changes). They range from a high of 2.9%yr on the ‘no change’ scenario to 1.8%yr and 1.3%yr on the higher savings rate scenarios.

Given house prices are only halfway down on most measures, I suggest taking the over on saving and the under on spending.

If consumption comes in at 1.3% then along with falling dwelling construction, topping infrastructure and tapering business investment domestic demand will come around the same:

Unemployment will be rising at a good clip risking a disastrous feedback loop into house prices.

Rate cuts are coming and there is a building asymmetric risk in waiting for them. The more the delay the less impact that they will have as deflation expectations embed with a souring economy.


  1. Houses prices half way down ?
    I’d say 20% of the way down
    What jobs are people going to do to pay off $1.7 trillion
    Let’s say with interest over 30 years $2.7 trillion
    And that’s not looking at credit card debt at 20%
    And car loans too
    After tax rates people have to earn maybe $4 trillion gross to pay off
    Mortgage holders have switched to a mentality of paying off
    They have been using their home as an ATM because someone told them houses never go down in value
    So how could consumption not fall through the floor
    How could prices not fall 50%
    This int only reset, but wait until 2020 when the 10 year int only loans roll to p and i
    Repayment doubles
    There’s billion falling due to p and i from 2020
    All the banks btw 2010 and 2014 approved a huge amount of 10 year int only
    2015/6 is when 5 years int only came in
    Go walk down South Bank in Mel down King to west mel and count the cranes
    Drive through suburbs of Mel and see how many 4 story blocks are being built
    2 diff people told me that the person holding the stop go sign gets over $100 per hour ????
    What happens when all these apartments are finished in May 2020 ????
    Going to be a disaster of epic proportions
    We are going to go down like the titanic

      • Did you just assume bcnich’s handedness?
        I’m cackhanded, and I’m feeling triggered and repressed by your biased comments assuming everyone is a righty.

      • CaptainFeatherSwordsGhost-TheHaunting

        lol, lets all put our hands back in our ‘safe spaces’ and calm down

    • I’m jumping on the bandwagon here. Florida here we come. I’ve spent plenty of time there over the years and we’ve got them covered. They overbuilt, so did we, they had eyewatering immigration levels, so did we, they gave money to dead people, so did we, they used the home as an ATM, so did we. But we’ve got them covered in one area – they weren’t as hard core on the cross collateralising, levering one property off another driven in our case entirely by negative gearing. We really supersized our speculative stupidity. They had 80% peak to trough in that state. We’ll go close.

      • Ignorance is bliss, for now
        The on-rushing, crushing reality will be hell

        We’ll be underwater like Miami in a hurricane

      • OfficeboyMEMBER

        The Indian buyers will come in at dollar bottom and 30% house deflation and bench the drop i reckon
        at say … 35%. There you go whats 35% ? … the last 30% was a bullshit on paper rise anyway who cares.

    • HEY! This is Wiley’s job… Who appointed you führer of the sausage people chieftain of the pudding race? 😛

  2. Given all the headwinds facing house prices (Hayne, flat wage growth, Chinese pullback etc), I’d like to know what will turn things around…ie stop the decline.

    Buehler? Buehler? Anyone?

    • Hopium. Available by the industrial-sized tanker at Domainfax headquarters, ready to be inhaled.

  3. HadronCollision

    Toro now offering 0% interest on ZTs etc
    Kubota probably similar
    Deere low interest on tractors
    Makita sales via Bunnings now starting – getting cheaper

    Now if only damned labour wasn’t a minimum 65/hr

      • HadronCollision

        Only for tilers on my area. (Rural/Regional NSW)
        They don’t even respond to quotes (with ALL the dims/scope in an email nice and easy)

  4. I saw you at the auction back in twenty ten
    Egging on a bunch of crazy men
    If I was young it didn’t stop you spruiking then
    Oh a oh
    They took the credit for your second property
    Foreclosed by banks with no mercy
    And now I understand the problems you can see
    Oh a oh
    I met your brokers
    Oh a oh
    What did you tell them?
    Hayne killed the real estate star
    Hayne killed the real estate star
    Opal came and broke your heart
    Oh, a, a, a, oh
    And now we meet in an abandoned agency
    We read the clearance rates, a long lost fantasy
    And you remember, the agents used to see
    Oh-a oh
    You were the first one
    Oh-a oh
    You were the last one
    Hayne killed the real estate star
    Hayne killed the real estate star
    Living homeless in our cars, we can’t rewind we’ve gone too far
    Oh-a-aho oh
    Oh-a-aho oh

    • Cracker! Although that tune will be stuck in my head for the rest of the day.

      Heard John ‘Wacka’ Williams interviewed on radio last night. He led the charge on the RC. Scathing on the regulators. Scathing, yet they reappoint Byers for another 5 years. WTF?