S&P Global says two-speed consumers are clouding outlook for inflation and interest rates

The emergence of two types of Australian consumers threatens the ability of businesses to predict the outlook for inflation, interest rates and retail demand, says S&P Global.

Older Australians are spending while their younger compatriots pull back, according to S&P Global. Picture: Chris Pavlich

Diverging consumer profiles are clouding the outlook for inflation, interest rates and retail demand, as businesses look to navigate volatile conditions.

S&P Global says high – albeit moderating – inflation is playing a key role and revealing a two-speed consumer profile: older generations are spending; younger people are cutting back.

While a narrow path to a soft landing – one the Reserve Bank is hoping to engineer – is in view for most of corporate Australia, S&P Global primary credit analyst Sam Playfair said this was clouding the outlook for interest rates, inflation and retail demand.

“Uneven consumer demand and strong immigration flows are adding to the challenges for the RBA to contain inflation and provide interest rate relief,” he said.

“Older consumers continue to spend, supported by strong equity and housing markets and higher savings rates. Conversely, there is a weaker underbelly of consumers, whose consumption patterns reflect the effect of higher rents, mortgage rates and shelf prices.”

Mr Playfair said the government’s offer of tax cuts and stimulus measures were unlikely to be a solution to all problems. He added that Wesfarmers stood to benefit from the downturn, with the owner of Kmart and Bunnings ­offering a range of products and low prices that appealed to financially burdened consumers.

“Additionally, growth in at-home consumption will continue to support supermarket operators Coles and Woolworths as consumers look to save,” he said.

“Labour costs, spending on antitheft technology and consumer preferences for cheaper products will, however, maintain pressure on prices and margins. Regulatory scrutiny will also limit retailer pricing flexibility.”

Mr Playfair said S&P Global expected most of its rated issuers, which represent primarily the largest companies, to benefit from agile operating strategies, strong balance sheets and leading market shares as they navigate tougher operating conditions.

But for some sectors, such as office REITs, the landing will be much harder.

S&P Global observed many office funds were counting on asset sales over the next 18 months to maintain rating and covenant headroom as landlords wrestle rising interest costs, elevated capex, investor redemptions and declining asset valuations at a time of structural and cyclical weakness in demand for office space.

“We consider secondary-grade office assets most at risk as tenants consolidate their space ­requirements into prime quality, energy-efficient office buildings,” Mr Playfair said. “We believe strategic shifts, capital recycling and growing confidence that interest rates have peaked should help to broaden the pool of office asset transactions over the next 12 months.”

Growth in the economy slowed to a crawl in the June quarter, with an increase in government expenditure and a jump in spending by foreign students propping up an economy otherwise shuddering to a halt.

In the three months to June, GDP expanded by a tepid 0.2 per cent, the Australian Bureau of Statistics reported on Wednesday, as stubborn inflation, a soaring income tax take and elevated rates squeezed households.

The quarterly GDP reading brought annual growth to 1 per cent – the weakest annual GDP result since the end of the early 1990s recession outside of the coronavirus pandemic.