Chart of the Month - February 2023

Are Australian consumers starting to crack?

The Australian economy has many commentators puzzled. Interest rates and inflation have risen to their highest levels in years but households seem to be ok: unemployment remains low and household spending keeps increasing. The only sign of stress seems to be in the rental market! But maybe, if you look close enough, you will see some small but significant signs of financial stress among consumers.

Small signs of financial stress

The chart below shows total consumer credit card balances, credit card balances accruing interest, and the value of credit card transactions since 2002.

Credit card transactions and balances dropped sharply in April 2020 as consumer spending collapsed with the onset of COVID-19. But buoyed by government assistance, consumer spending recovered strongly from May 2020. The value of credit card transactions also jumped, but armed with government assistance credit card balances stayed down.

However, credit card balances have now bottomed out and are slowly starting to creep up again. This could be a sign that despite low unemployment, consumers are finally showing signs of financial pressure from rising inflation and interest rates. Consumers are still spending but are increasingly doing so out of credit.

Saving is also down

Consumers are also dipping into their savings, with the savings ratio continuing to fall. This could be another sign of financial stress.

Mortgage payments

Consumer stress can also be seen with mortgage payments. Scheduled repayment and charged interest have of course increased with the rise in interest rates, but excess housing payments have continued to fall since September 2021. Consumers no longer have the extra cash to pay off their mortgage faster.

Consumer sentiment

Nervous consumers can also be seen in the continuing downward trend in Westpac’s consumer sentiment index.

What does this mean for interest rates going forward

These signs of consumer stress will eventually impact consumer spending and when this is seen in the data, it will give the RBA confidence that the demand piece of inflation is coming under control and that they can start to slow interest rate rises.

For those investing in fixed income and private debt, we may be starting to see the early signs of the top of the interest rate cycle.