Why Aussie consumers are so gloomy

Rampant inflation has consumers worried. (Source: Getty)

We consumers are deeply pessimistic. Gloomy. Miserable.

Both the ANZ- and Westpac-sponsored measures of consumer sentiment are so weak they are tracking at levels usually associated with recessions.

Recessions are when the unemployment rate is skyrocketing, businesses are failing at a rapid pace, markets are crashing and the economy is going backwards. At the moment, there are no signs of that combination unfolding in the Australian economy.

So what is happening now?

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The similarities now to other experiences of extreme consumer pessimism during past recessions is genuine financial pain for much of the population. In recessions, that financial pain is usually because you lost either your job, your business or part of your savings and wealth in a market crash.

Now, rather than a recession, the financial pain is directly linked to financial issues - cost of living to be specific - with a little bit of wealth erosion as house prices, the bond market and stocks weaken.

The latest data on the health of the labour market is still upbeat. Private-sector wages growth, including bonuses, is running at an annual pace above 4 per cent - the fastest in more than a decade. At the same time, the unemployment rate remains at a 48-year low at 3.4 per cent - the level associated with the economy operating at over full employment.

Unemployment is at historic lows, so why are Aussie consumers so glum? (Source: Getty) (olaser via Getty Images)

These are not the causes of the current bout of pessimism. Much of the gloominess today is linked to the surge in inflation over the past 18 months.

With annual inflation tracking at 8 per cent, the cost of everyday items is far in excess of income growth. The price of items such as electricity, fruit and vegetables, rent, petrol and holiday travel - to name a few - are booming, meaning people are either paying a lot more for those items and/or they are cutting back on some ‘nice to do’ things because the household budget is so stretched.

Little wonder we are all feeling glum, even though virtually everyone who wants a job has a job and pay levels are starting to pick up.

Interest rate hikes are also impacting sentiment. While savers may be rejoicing over the fact deposit interest rates have lifted, which is boosting their income, this good news for them is being swamped by those with a mortgage or a business loan or overdraft. Mortgage holders, in particular, are adjusting to rising interest rates after a decade where the only direction of changes in interest rate was down.

Their monthly repayments are rising and/or the speed at which they are paying off their mortgage is slowing down. Bummer.

The effect of the fall in house prices should not be underestimated.

While the fall in house prices is orderly and moderate, each 1 per cent decline trims around $100 billion from household wealth. The approximately 6.5 per cent fall in nationwide house prices to date means that householders have had their wealth decline by $650 billion from the house price weakness.

Not good news for the two-thirds of the population who own a house.

What’s also vitally important is the dislocation in the rental market. Not only are rental vacancy rates around 1 per cent - a record low - but asking rents in most cities and regions are rising by 15-20 per cent.

Not only is it hard to find a place to rent but when you do, the rent is markedly higher than it was just a year or two ago. Only landlords are celebrating but even their euphoria is being squashed by higher interest rates and falling prices.

This tough time for housing is feeding into the consumer pessimism.

The reason all of this matters is that when consumers are gloomy, they tend to pare back their spending. This is already showing up in the retail-spending numbers, which saw growth in real terms of just 0.2 per cent in the September quarter. Further sluggish growth is likely in the months ahead.

There is, however, light at the end of the tunnel of pain.

Inflation is set to fall away sharply through 2023. The global economic slowdown is already impacting inflation in much of the world. That will continue and will show up in Australia by the start of 2023. Stock markets have edged up in the past month, which is adding to wealth.

The rate of house price decline is also tapering off and it would be no surprise to see house prices bottom out in the first quarter of 2023. It is also clear that the RBA is near the end of the rate-hiking cycle, which means further cash-flow constraints on mortgage holders are unlikely to be too severe.

The next couple of readings for consumer sentiment should start to edge higher. A lot of bad news is already incorporated into our mood.

Any hints of better news on cost of living, wealth and housing will see a more optimistic consumer.

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