UBS consumer survey warns more consumer and retail pain to come as RBA’s rate hikes hit
As a larger slice of household budgets are taken up by rent and utilities, consumers will need to savagely rein in their spending on entertainment, eating out and leisure.
A larger proportion of household budgets is being taken up by “pain” categories such as utilities, rent and insurance to force a growing cohort of consumers to begin to sharply reduce their spending on “fun” like entertainment, recreation and eating out.
Millions of households are under pressure from the cumulative weight of 12 months of successive interest rate rises and cash reserves that have now been emptied, according to by investment bank UBS, which surveyed 1,000 adults between mid-May and the start of June.
And while higher income earners still have the spending ammunition drawn down from their own cash piles and investments, poorer households are being forced to borrow from friends and family or sell belongings to cover daily expenses.
The dour and sombre analyst of Australian consumers and the outlook for the $400bn retail sector – a linchpin of the national economy – comes as more and more retailers come out to confess dwindling sales and crunched profits from the pullback in discretionary spending by hamstrung households, according to the UBS Evidence Lab survey.
UBS strategist Richard Schellbach says “pain” bills such as utilities, rent and other cost of living expenses are now starting to overwhelm many consumers with the mortgage belt – which is a demographic made up of millions of households and consumers – to slash discretionary spend as interest rates and cost of living bites.
“Middle-income households are now showing clear signs that the transmission of pain from the rate hiking cycle, which began over a year ago, is now hitting hard.
“With cost of living categories unable to be scaled back – in nominal terms, due to sticky inflation – consumers in ‘mortgage belt’ Australia are telling us that they expect to sharply reduce their spending on ‘fun’ categories, such as entertainment, recreation, eating out, takeaway food, and international travel,” Mr Schellbach says.
Mr Schellbach believes the Australian consumers’ impressive resilience over the past 12 months was aided by a cash war chest built up through the Covid years. But the second quarter consumer results show how many low-income consumers have now run out of savings, and are increasingly having to borrow from others, or sell their belongings, to fund daily spending.
And the mortgage cliff is coming.
“The overall picture is households in aggregate have ‘spent to the cliff’, with the first quarter 2023 household savings ratio already dropping to 3.5 per cent, the lowest since the global financial crisis.
“However, household deposit growth remains remarkably resilient at 8 per cent year-on-year in April 2023, suggesting – at least for some households – that strong income growth means they still have plenty of cash available to support spending ahead.”
Consumers who were surveyed by UBS said they believed there were more interest rate hikes to come from the RBA, and hence more “pain” that is likely to spill over into further drooping sales for discretionary retailers.
“Consumers tell us the RBA still has more to do!” says Mr Schellbach.
“Consumers informed us that their mortgage rates have already risen by around 300 bps over the past 12 months, and that they expect another 100 to 300 bp hit to come through over the next 12 months.
“This hawkish view from the Aussie consumer tells us to expect a spending slowdown to accelerate from here. At the same time, it also suggests that the consumer is at least quite well aware of the storm they are headed into.”
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