Covid-19 savings a ‘powerful spending boost’: UBS

Savings accumulated during Covid-19 lockdowns should provide a ‘powerful tailwind to consumption’ for at least the next six months, according to UBS.

Australian Bureau of Statistics figures released last week showed a 9.6 per cent increase in retail sales for April compared to a year earlier. Picture: NCA NewsWire / David Crosling

Savings accumulated during Australia’s Covid-19 lockdowns have yet to be drawn down – unlike in the US – and should provide a “powerful tailwind to consumption” for at least the next six months, according to UBS.

The investment bank’s economists said in a note that despite the savings, consumer sentiment had soured and a sharp slowing in retail sales is expected after the initial rush of reopening and as the Reserve Bank is expected to pass down significant rate hikes.

“Looking further ahead, the impetus from the reopening will fade, but remains a positive factor for now,” wrote the UBS economists led by George Tharenou.

“On a relative basis, the RBA has been slower in hiking rates versus peer economies and domestic inflation is expected to peak later and lower than global trends.

“But towards the end of 2022, we expect the rate of spending to moderate as savings retrace to more normal levels and rate hikes start to bite household cash flow,” the economists wrote.

Australian Bureau of Statistics figures released last week showed a 9.6 per cent increase in retail sales for April compared to a year earlier.

The data shows that the largest rises was in spending in cafes, restaurants and on takeaways, clothing and footwear. Spending fell on household goods and in department stores, while food spending rose 6.5 per cent compared to April 2021.

Unlike other market observers, the UBS economists expect the RBA to stop its cash rate hikes at 1.6 per cent – well below where others forecast it will go.

“The RBA is likely to be cautious given sentiment has weakened materially more and earlier than during prior tightening cycles and our view that house prices fall (more than) 5 per cent in peak-to-trough terms – we forecast the first fall in May,” the UBS research reads.

Residential price values for May will be released on Wednesday. “The spike in inflation has already dragged consumer sentiment towards recessionary levels and inflation is expected to rise further and not peak until (late in 2022).”

Last week, economists at Barclays said, while retail sales was continuing to grow, this was likely “being boosted in part by high prices, although the steady increase in prices may start to erode discretionary consumption”.

“Australian households still have large savings, with (fourth quarter) saving rate still double of pre-Covid.

“That said, inflation running at 5 per cent may begin to weigh on households’ discretionary spending,” the economists wrote.