Aussie retailers brace for consumption meltdown

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Australia’s retailers are bracing for the toughest conditions in a decade amid soaring food, power, mortgage and rent costs, according to Barrenjoey consumer analyst Tom Kierath:

Kierath said it was hard to think of when conditions had been tougher for retailers over the past 15 years, with consumers now battling a “cocktail” of higher interest rates, food and fuel costs.

“It’s easy to see why consumer confidence is back to GFC levels. Increasingly, we think [Financial year] 23 will be as difficult as FY19, potentially worse in some categories,” he wrote in a note to clients.

Meanwhile, Macquarie’s equities team placed downgrades on JB Hi-Fi, Harvey Norman and Wesfarmers, predicting “significant pressure on discretionary spending” going forward…

It is not retailers that I am concerned about, but the broader Australian economy.

Household consumption accounts for more than half of the economy’s growth. Therefore, where household consumption goes, the economy usually follows:

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Consumption versus growth

Household consumption drives growth.

Never before has the Reserve Bank of Australia (RBA) commenced a rate hiking cycle with consumer confidence in such a poor state, with the ANZ-Roy Morgan consumer confidence index tracking well below the trough of the Global Financial Crisis at early-1990s recessionary levels:

Australian consumer confidence

Consumer confidence already at recessionary levels.

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With mortgage rates tipped to rise to around 6% (economists’ forecast) or 7% (futures market’s forecast) by mid next year, Australians are facing a 33% to 50% lift in monthly mortgage repayments from where they were in April before the RBA began its tightening cycle.

If rates rise that aggressively, household consumption will likely collapse on the back of a sharp fall in household disposable income (as money is diverted into mortgage repayments), alongside the negative wealth effect from falling housing values.

In short, if the RBA hikes too aggressively, it risks plunging the economy into a consumer-led recession.

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Hopefully the RBA will stop hiking long before the bullish interest rate forecasts come to fruition.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.