Westpac sees soft landing for Australia, but issues warning for consumer sector

The banking major is expecting a ‘soft landing’ for the Australian economy, with slightly higher unemployment but continued growth, says CEO Peter King.

Westpac’s boss Peter King has warned Australia’s retail sector is in for a period of pain, but cautioned he expected a soft landing for the economy with a lift in unemployment but growth continuing. Picture: Tertius Pickard/NCA NewsWire

Westpac boss Peter King has warned Australia’s retail sector is in for a period of pain, but he expects a soft landing for the economy with a lift in unemployment as growth continues.

Speaking at the Macquarie Australia Conference, Mr King said the Australia’s most successful companies were not facing a downturn, but were instead being constrained by a shortage of skilled labour, which he said was a “bottleneck to growth.”

“Shortage of skilled labour is a common theme that we are seeing,” he said on Wednesday.

But Mr King said while the banking sector was enjoying a period of low loan losses, broader problems across its loan books will show up at some point.

He warned parts of the economy were seriously exposed to the downturn, which has seen consumer spending tumble as borrowers and renters retreat from shops in the face of higher living costs.

Mr King said Westpac was largely seeing issues on a company by company basis, rather than sector wide concerns, as the bank weighs up its business lending exposure.

He said the construction sector, which months ago found itself hurt by higher borrowing costs and a blowout in materials spend, had now largely worked through its issues.

But he warned retail was facing “challenges”, noting shops that had over ordered stock were likely to “find themselves getting caught” as consumers pulled back.

The latest retail data shows spending fell 0.4 per cent between February and March, on a seasonally adjusted basis, near its lowest levels since the pandemic

The Australian Bureau of Statistics warned retail had been flat for six months and despite rampant population growth was showing its weakest growth on record.

Mr King said stress from inflation and higher living costs was flowing through the consumer market, but noted despite “one name at the larger end” Westpac had booked “low and stable write-offs” from problems in its business lending portfolio.

Mr King said Australia’s banking sector is enjoying a period of benign stability, but warned the sector will face a reckoning, cautioning the period of low loan losses can’t go on forever.

Mr King said Westpac was enjoying a period of low loan losses and arrears, despite the run-up in loan costs that have pinched many borrowers.

He said this was coupled with runaway house prices that meant that many homebuyers were now increasingly wealthy and better prepared for tough times, while lower income Australians were shut out of the housing market.

“Banking is cyclical, there will be a downturn and that will impact banks,” he said.

“You can’t rule out a downturn at some point because the economy is cyclical.”

Mr King said he was not concerned about a potential blow out in credit card debt, a sector which was seen in the past as the “canary in the coal mine”.

But the Westpac boss pushed back on suggestions responsible lending laws were the cause of many Australians being shut-out of the housing market.

“The problem is not access to debt, the problem is supply of houses,” he said.

This came as house prices hit a new record high, amid a surge in demand.

Mr King said the housing market did not “suffer from a lack of credit”.

“It suffers from housing prices being too expensive,” he said.

But he did note Westpac was being “probably a little bit too” conservative in its lending around unsecured personal loans.

“That probably does bleed up into small business,” he said.

Mr King also warned about the rise of private lending, amid talk of turning the super sector’s rivers of cash into credit.

He warned there had to be safeguards around the lending, with the banks subject to strict regulation by the Australian Prudential Regulation Authority.

“We’ve got to make sure the standards we apply are the same in the two big savings pools,” he said.