Businesses hope tax and rate cuts will revive consumer spending

While many Australians have been forced to alter their spending habits in the cost-of-living squeeze, businesses say consumer resilience has been better than feared.

While the consequences of 13 interest rate rises from the Reserve Bank and soaring cost of living pressures might have forced many Australians to change spending habits, corporate Australia says that the resilience of the consumer remains much better than feared.

Looming stage 3 tax cuts from July 1, and the prospect that the RBA will begin to lower rates soon after, could mean that a pullback in consumer spending will ease.

The past 18 months has forced consumers to become more savvy with many retailers noting a rise in trading down to cheaper alternatives, while others are holding back spending for big sales such as Black Friday or Boxing Day.

Economists expect the pullback in consumer spending is near the bottom, but say the wounds from relentless rate and price rises means households won’t be quick to open wallets.

“The battle wounds will linger for some time as the small amount of money households will get back each week from tax cuts won’t make up for a huge rise in mortgage payments,” AMP chief economist Shane Oliver said.

“But we will see the pressures that have held back spending ease and we know that lower and middle income earners are much more likely to spend any tax cuts they get which will be good for businesses.”

Dr Oliver added that while interest rates have peaked at 4.35 per cent and inflation continues to fall, the next six months could see households tighten spending further as emergency savings buffers built up during the pandemic have all but evaporated and few people remain on ultra-low fixed rate mortgages.

“The support we’ve had over the last few years such as savings buffers and fixed rates are starting to wear thin. Consumers have been protected by those, but will now be much more exposed and that is a risk for spending,” he said.

Consumer confidence as surveyed by ANZ has been at recession levels for the past year as households continue to be pessimistic about the outlook for the economy, while retail spending in December was the worst since Covid-19 lockdowns in 2020.

The outlook comes as many businesses, including retailers, booked lower profits in the past six months compared to a year ago, but the resilience shown by consumers means the results were not nearly as bad as expected by analysts.

KPMG Australia chief economist Brendan Rynne.

Analysis from Macquarie shows domestic cyclicals have delivered the best results, with positive surprise across sales, margins and dividends. The broker said domestic cyclicals – stocks such as retailers impacted by macroeconomic or systematic changes in the overall economy – are the reason why this results season has been better than expected.

Betashares chief economist David Bassanese said continued resilience shown by consumers has meant businesses have been able to pass on cost increases and deliver better results.

“Businesses have been able to fully pass on the cost increases, preserving their profit margins, but it’s come at the cost of consumers feeling the pain,” he said.

“Hence, if you look at the business and consumer confidence, there’s a huge dichotomy. Business confidence (is at) close to long run average levels, if not a bit above it, whereas consumers are almost at recessionary levels.”

Consumer stocks have been more resilient than expected with many retail CEOs becoming confident that the current period is about as bad as it will get. Inghams chief executive Andrew Reeves said promised tax cuts and stable interest rates could help consumer demand this year. “The combined effect of tax relief for consumers and modest slowing in the overall rate of inflation may provide some benefit during fiscal 2025,” he said.

Vicinity Centres CEO Peter Huddle said consumers were faring better than it had expected and consumption could start to rise by late 2024.

But retailers were noting that some consumers were under pressure with Wesfarmers CEO Rob Scott saying its Kmart and Bunnings brands were well placed to benefit from shoppers seeking better value.

JB Hi-Fi saw sales fall but not as much as analysts had expected as CEO Terry Smart said shoppers were increasingly haggling with staff when looking to buy a TV or computer and were prepared to shop for the best price.

KPMG chief economist Brendan Rynne said what households had been subjected to in the past year could result in permanent changes to spending habits.

“The tightening in disposable income over the past year has created a much keener eye for value and you can see that with changing spending habits to big sales events such as Black Friday,” he said. “Households realise that you can get much better value for money and just because they will get a small increase in after tax income doesn’t mean people will stop not wanting to get better value.”

Commonwealth Bank CEO Matt Comyn expressed optimism about the outlook for households after the bank reported a 3 per cent fall in cash earnings.

He said eight in every 10 home loan customers were ahead of repayments and that a rebound in the economy later in the year would support further growth.