By Shane Wright
Consumer spending across NSW and Victoria is tumbling under the weight of super-sized mortgage repayments and the nation’s biggest lender predicts the Reserve Bank will need to slash interest rates a full percentage point to stabilise the economy.
Ahead of the release of the figures, which could show wages growing faster than inflation for the first time since the first COVID-related lockdown in 2020, a new measure of household spending compiled by the Commonwealth Bank shows consumers struggling to make ends meet.
Consumers in the states with the largest mortgages, NSW and Victoria, are cutting their spending the most under the weight of high interest rates.
The CBA’s new household spending index, based on the expenditure patterns of 7 million people collated through cards, accounts and electronic payments, was flat in July to be up by just 1.3 per cent in the past 12 months.
During that period, inflation was 6 per cent, pointing to a substantial drop in real expenditure.
CBA chief economist Stephen Halmarick said the index reflected the effect of the 4 percentage point lift in official interest rates imposed by the Reserve Bank since May last year.
In the states with the highest average mortgages, NSW and Victoria, spending at an annual rate has fallen by 0.2 per cent and 0.3 per cent, respectively. Spending is holding up in areas with the smallest mortgages including South Australia and WA.
“Monetary policy is now restrictive and financial conditions will continue to tighten in the months ahead on the lagged effect of RBA interest rate increases and the fixed-rate mortgage refinancing task,” he said.
“We continue to expect household spending to weaken further over the remainder of 2023 and 2024.”
Halmarick said he expected the Reserve, which took the cash rate to an 11-year high of 4.1 per cent in June, would cut rates by a full percentage point next year. He predicted two further cuts in the first half of 2025.
A percentage point reduction in the cash rate would save a household with a $600,000 mortgage about $400 in monthly repayments.
The CBA tips the economy will expand by just 0.7 per cent this year, lower than the Reserve Bank’s own modest forecast of 0.9 per cent growth.
Over the past year, the biggest increase in spending by consumers, as measured by the CBA, has been insurance, up by 13.2 per cent.
Insurance premiums have surged in the past year. The Actuaries Institute on Monday warned that one in eight households are struggling to pay their home insurance.
Spending on household goods fell by 5.4 per cent in the 12 months to July while expenditure on transport (down 6.1 per cent) and household services (down 7.9 per cent) also fell.
Despite the poor conditions, Australians will increase spending under certain conditions.
Halmarick said spending through cinemas had lifted by 65 per cent last month as people rushed out to watch Barbie and Oppenheimer. There had also been an increase in expenditure associated with the World Cup.
But these jumps were effectively one-off events that were unlikely to be repeated, he said.
A lift in wages growth could help offset the effect of interest rate rises and inflation.
The Australian Bureau of Statistics on Tuesday will release the June quarter wage price index. Markets tip the index to show a 0.9 per cent increase through the June quarter. During the same period, the consumer price index shows overall prices up by 0.8 per cent.
An increase of 0.9 per cent or above would be the first time in three years wages have outpaced inflation.
At the annual rate, however, wage growth is at 3.7 per cent compared to inflation at 6 per cent.
Treasurer Jim Chalmers said getting wages growing was a central part of the government’s economic plan.
“A big part of tackling cost-of-living challenges is to help ensure ordinary Australian workers can earn enough to provide for their loved ones and get ahead,” he said.
“We understand that securing real wages growth means getting inflation under control, which is why addressing the inflation challenge is the central focus of our government.”
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