Consumers cutting spending on discretionary items as inflation and interest rates soar

Desperate to trim their budgets to make room for higher mortgages and rents, consumers are pulling back on gyms, cafes, entertainment and travel, according to the CBA.

Households are preparing to wind back their spending on travel, gyms, cafes, department stores and entertainment as family budgets are savagely snipped by rising interest rates, rents and other cost-of-living expenses such as childcare and food bills.

Actual spending and spending intentions on homes has also fallen sharply in June, not surprisingly given the Reserve Bank lifted official interest rates again that month, while consumers are also looking for savings elsewhere, such as reining in expenditure on gym memberships, fitness classes and health.

The latest Commonwealth Bank Household Spending Intentions index fell 1.7 per cent in June, as consumer activity continued to weaken across a range of categories, led by declines in home buying, health and fitness, enter­tainment and travel.

Home-buying spending intentions declined 26.2 per cent in the month, led lower by a fall in home loan applications. Discretionary spending continued to weaken, ­according to the CBA’s HSI index, with entertainment spending down 5.4 per cent on May and 15.4 per cent on the year. Travel spending fell a further 2.5 per cent after May’s decline, with spending on hotels, motels and resorts, trailer parks and campgrounds, and sports and recreation clubs down.

The outlook for overall consumer spending intentions is even worse when looking at annual figures, with the annual pace of growth in the HSI index down at only 2.4 per cent for the year to June, from growth of just 4.7 per cent in the year to May and down sharply against the peak of 15.2 per cent in the annualised rate to ­August last year.

Given that inflation is running at above 6 per cent and the HSI measuring nominal spending intentions, it means the index is deeply negative for June and the year.

Consumers are cutting spending on discretionary items like department stores, gyms, cafes and travel as interest rates soar. Picture: NCA NewsWire / Emma Brasier

The latest HSI index released by CBA shows consumers under pressure from rising mortgage payments or new, higher, rent deals and trying to find savings elsewhere. They are removing discretionary spending items from their budgets first to create breathing room for mandatory bills such as utilities and food.

CBA chief economist Stephen Halmarick told The Australian the tightening of financial conditions in Australia, especially for households with a mortgage or paying rent, continued to constrain discretionary spending.

“There is very clearly a slowdown in the rate of annual change (in household spending intentions), which we think is a direct flow on from the higher interest rates that the Reserve Bank has put in place,” Mr Halmarick said.

“Real disposable income is declining and people are having to spend more of their money on housing – whether they’ve got a mortgage or rent as both are rising. Hence there will be less money to spend on everything else, and you can see that in the slowdown in a number of measures of spending including the HSI.”

And although the RBA took a break from lifting rates this month, many economists expect the central bank to resume its monetary tightening next month to heap further pressure on household budgets and consumer spending.

The CBA’s HSI index draws from a sample of 2.5 million households and transactions picked up by its credit and debit cards, which accounts for about 30 per cent of all cards on issue in Australia. The HSI index combines the internally generated CBA spending and lending data with publicly available Google trends search data to generate insights into current spending patterns and spending intentions.

The latest results for June paint a bleak picture for the strength of the consumer and the $400bn retail sector that is traditionally one of the key drivers of economic growth and employment.

Some of the mortgage pain from higher interest rates could take months to feed through to ­actual higher monthly payments by home borrowers, Mr Halmarick added, with “a lot of tightening still to come” as many households also switch from a fixed rate to variable home loan rate.

This could result in further belt tightening by consumers, and worsening spending intentions, well into next year.

“We are forecasting a final rate hike from the RBA in August, taking the cash rate to 4.35 per cent. Given the lags involved with monetary policy, financial conditions are expected to continue to tighten for many households well into 2024,” Mr Halmarick said.

Among some of the heaviest falls in spending intentions for June recorded by CBA, health and fitness was down 5.6 per cent, or down 5.8 per cent on an annualised basis, travel was down 2.5 per cent and retail down 0.6 per cent.

Motor vehicle spending rose a further 3.8 per cent in June and is now 66 per cent higher over the past year – the fastest growth of all categories – as supply chain constraints ease and car imports into Australia increase. Utilities spending is up 7.2 per cent in the year to June on the back of higher bills – the fastest pace of increase in the history of the HSI series data going back to 2017.