Consumer confidence plummeted again in October, following the announcement of a further increase to the cash rate following the Melbourne Cup Reserve Bank board meeting. Just two months ago, consumers, and most economists were reasonably confident we’d reached the end of the monetary policy tightening cycle. However, higher than expected September quarter inflation forced the RBA board’s hand.
In line with falling consumer confidence, retail sales also fell by 0.2 per cent over the month, although this can be partly attributed to consumers waiting to make major purchases during the Black Friday sales. Of greater concern is that spending in the café, food and takeaway food services category fell for the second consecutive month. This category is not impacted by consumers holding out for Black Friday sales, and is further indication that many Australians now have significantly less discretionary dollars to spend than this time a year ago.
RBA scores some points against inflation
This week’s monthly CPI data showed positive signs that monetary policy is finally taming the inflation beast. Excluding volatile items (fruit and vegetables and fuel), monthly CPI was down to 5.1 per cent, from 5.5 per cent the previous two months. Seasonally adjusted CPI fell below the 5 per cent barrier, to 4.8 per cent, for the first time since February 2022.
Food and non-alcoholic inflation increased slightly, from 4.7 per cent to 5.3 per cent in October due to slight increases in fruit and vegetable and meat and seafood inflation. Housing inflation is running at 6.1 per cent, still one of the highest contributors of the inflation categories, but also falling from 7.2 per cent the previous month due to Commonwealth Rent Assistance packages.
This monthly CPI release, combined with weak consumer spending and rising numbers of unemployed people, means the RBA will almost certainly hold the cash rate steady at the December meeting. This is good news for retailers and summer holiday makers, though consumers are likely to be wary of the fact that interest rates are likely to stay high until at least Q3 2024.
Population growth pushes up unemployment
Despite a solid increase in the number of employed people over the month of October, the unemployment rate still ticked up from 3.6 per cent to 3.7 per cent given the increase in unemployed people. Total employment over the year has increased by 3.0 per cent, however the number of unemployed people has increased by 13.2 per cent, meaning the lack of available workers that has been a feature of the economy since the end of lockdowns is now starting to be less of a problem for employers.
The increase in unemployment despite good gains in employment numbers can be attributed to population growth, increasing the pool of available people of working age population.
This data provides further evidence of continued weakening in the economy, and while this weakening is happening slowly, the unemployment rate gives the RBA an additional reason to pause the cash rate at the last board meeting of the year next week.
Retail trade softer as consumers wait for Black Friday
Retail sales fell an overall 0.2 per cent over the month of October, after recording rises in spending in both preceding months. For discretionary goods categories, this was to be expected, as many consumers chose to hold off on spending for November’s Black Friday sales. We expect that all categories of goods spending will see a good lift in spending due to these sales, following patterns that have emerged in recent years.
An area of spending that is not impacted by Black Friday, cafes, restaurants & takeaway food services, recorded a second straight fall in spending, after bucking the trend in other discretionary categories for many months. Spending in this category fell by 0.4 per cent and is now back to July 2023 levels. This indicates that consumers have finally started to pull back on dining out, in the face of cost-of-living pressures and rising interest rates.
It is concerning that this sector is already well and truly topping the rankings for external administrations by industry. In the 12 months to December 2023, one in 100 food and beverage services businesses went into external administration. There are now rising headwinds in this sector, as demand falls, the ATO calls in large GST and other tax debts, and labour, rent and energy costs all continue to rise. The food and beverage sector is also the second-ranked industry for payment arrears (behind construction), with 9.3 per cent of total invoices more than 60 days’ in arrears.
Business Confidence and Consumer Sentiment surveys show rising pessimism
Both Business Confidence and Consumer Sentiment measures, taken by NAB and Westpac respectively, showed increasing pessimism among both groups. Business confidence declined, while conditions improved slightly, which suggests that even though businesses might be doing okay for now, there is an expectation that these reasonable conditions won’t last. Related to this is the very weak consumer confidence measure, which turned significantly weaker following the RBA’s cash rate increase on Melbourne Cup Day.
These surveys both support CreditorWatch’s latest prediction for business failure rates. While business failure rates are quite low at the moment, we expect that they will quickly increase over the next 12 months to around 5.8 per cent. This is broadly the level that the failure rate was just prior to the COVID pandemic. However, the speed at which we expect the rate to change is quite pronounced, and more businesses folding or going into administration is likely to have a noticeable impact on business sentiment overall throughout 2024.
The Westpac Consumer Sentiment survey this month asked respondents a question about Christmas spending intentions, and 40 per cent of respondents indicated they intended to spend less on gifts than last year. The same proportion of respondents gave the same answer last year (and a normal year is 30 per cent of respondents) which points to a particularly bleak Christmas outlook for Australian retailers. It is likely that the Black Friday sales in late November will be very strong, as consumers hunt for bargains and carefully plan their Christmas spending. However, December spending is likely to be weak, as consumers avoid making last minute, full priced purchases and cut back on spending generally.
The RBA took further measures to reduce inflation by increasing the cash rate to 4.35 per cent following the Melbourne Cup Day board meeting. New RBA Governor Michelle Bullock had made it clear she will have a low tolerance for accepting higher inflation for any longer than their current outlook suggests.
Unfortunately, the grim reality is the goods or services that are still recording high levels area inflation are not under any demand pressure, therefore this cash rate rise will have little impact on prices of rents, fuel, insurance and utilities. Instead, this cash rate rise will be most burdensome for those businesses already at the coalface of the fight against inflation, such as the food and beverage, retail trade and construction sectors.
Demand in these sectors has already contracted, and higher interest rates will force consumers and future home builders/renovators to further rethink their future spending decisions. If we have indeed reached the peak of the monetary policy tightening cycle, then it is likely that the cash rate will be held at this level for longer than previous cycles, which was roughly six to nine months. Inflation is proving quite challenging to tame in this cycle, fuelled in part by very high immigration levels, and older home owners who are not impacted by increasing home loan rates or rents, and can maintain their spending on both discretionary and non-discretionary goods.
The global view
In further positive news for inflation domestically, overseas inflation rates in major economies continue to fall at a steady pace. Euro Area inflation, as at October 2023, was 2.9 per cent, while the UK and USA recorded 4.7 and 3.2 per cent respectively. Given Australia tends to lag these countries by roughly six months, this is indeed hopeful news for home borrowers who are looking for some future reprieve in interest rates. However, Australia does stand out with very large immigration numbers, which increases the risk that inflation will be slightly harder to tame Down Under than in other developed economies.
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