Cost-of-living Pressures
Last updated on December 12th, 2022
No Slowdown in Household Spending Despite Cost-of-living Pressures rising in 2023
Economists from ANZ expect household spending to decrease in 2023, following a year of high inflation, interest rate increases and cost of living pressures. Pushing the anticipated spending decline is the rising cost of household debt and the roll-off of fixed rate mortgages. As noted by ANZ Senior Economist Adelaide Timbrell in June 2022, 35 per cent of outstanding home loans were fixed, compared to 20 per cent at the beginning of 2020 based on data from the Reserve Bank of Australia (RBA).
According to Timbrell, the “high levels of household debt make household spending more sensitive to rate hikes. Most of the fixed-rate loans will expire in 2023, which will lead to sharp increases in interest payments for many households.”
For example, the Commonwealth Bank has $22 billion of fixed-rate loans expiring by the end of 2022 and $117 billion worth by the end of 2023.
As ANZ economists forecast the cash rate to reach 3.60 per cent by the middle of 2023, 27 per cent of households would need to allot 30 per cent or more of their income to mortgage repayments.
In addition, the Reserve Bank’s October Stability Review says that more than half of variable-rate owner-occupier borrowers can expect a more than 20 per cent decline in spare cash flows in the next couple of years.
On top of this, 15 per cent of households may see negative cash flows as they feel the combined burden of the higher cost of essential goods, services, and interest payments.
The RBA recognises that low-income and highly indebted households would be forced to spend more of their savings to make their loan repayments and meet essential living expenses.
On the other hand, those with white-collar jobs – or middle- and upper-income households – have more significant savings buffers to tide them over these uncertain times. That is because, whilst they were able to keep their jobs during the pandemic, they had nowhere to spend their money on. So instead, they saved it into offset accounts.
Despite six consecutive interest rate increases, spending has not yet significantly slowed. In fact, the latest Australian Bureau of Statistics (ABS) monthly spending indicator increased once more to 127.7 in August 2022.
Cost-of-living Pressures remain despite the expected spending slowdown in 2023
Even with low consumer confidence looming, Australians continue to spend more on discretionary goods. For example, household spending on clothing, footwear, recreation, dining out, and health and fitness rose by 29.8 per cent.
Timbrell expects that the rise in interest repayments due to rate hikes, combined with the rising cost of essential goods and services, will put pressure on discretionary household spending. In addition, the scarcity of affordable rent, mainly due to low vacancy rates, is also a risk for some customer groups.
Recent flooding in the southern regions of the country is expected to set back the pricing of essential goods and services to see out the year. This will add to cost-of-living concerns, as damaged crops and livestock will push up the price of basic goods.
Australians are warned to brace for even higher prices as the Holiday Season approaches, an unavoidable consequence of being impacted by natural calamities.
Data from UBS shows that fresh food prices have increased by 9 per cent, whilst dry goods increased by 7.7 per cent.
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