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Preston 27 June2023(TIE) Consumer Spending Hits the Brakes as Interest Rates Take Effect
The impact of rising inflation and interest rates has reached a critical juncture, causing a sudden slowdown in consumer spending and raising concerns about a potential recession.
Recent profit warnings from consumer companies indicate a deepening decline in spending, prompting economists to suggest that interest rates will need to be raised even further to maintain control over inflation, which has been soaring for the past 18 months.
With inflation surpassing expectations, wage increases, and a hawkish stance from the Reserve Bank, experts predict that the cash rate could rise from 4.1 to 4.6 percent by September. Consequently, the likelihood of a recession in the coming quarters has surged to 50 percent.
Consumer spending had shown remarkable resilience until recently, driven by a “catch-up” effect resulting from delayed economic reopening and a robust job market. This led households to rapidly deplete their savings ratio, which now stands at 3.7 percent—the lowest since the 2008 Global Financial Crisis. However, signs of strain are beginning to emerge, according to UBS.
Retail sales and consumption volumes have remained stagnant for several quarters, but the increased expectations of rising interest rates this month have significantly amplified the risks associated with consumer spending.
UBS Australia’s chief economist, George Tharenou, stated, “Our economic growth outlook has consistently pointed to a sharp slowdown in the December quarter, reflecting weaker consumption. However, recent updates from companies suggest a sudden halt in spending, placing the economy at a tipping point. If the Reserve Bank of Australia continues to raise rates, there is a downside risk to our outlook, increasing the probability of a recession to around 50 percent.”
Despite the RBA’s significant rate hikes over the past year, the housing market has shown limited signs of strain, with mortgage arrears remaining low and house prices even rising in recent months. However, UBS highlights some new mortgage data indicating a recent upsurge in potential concerns.
