foreseechange

Australian Consumer Financial Wellbeing Boosted Post-GST

Charlie Nelson

Managing Director, foreseechange (www.foreseechange.com)

December 2000

More consumers are feeling comfortable about their financial well being since the introduction of the GST package in July.  While ability to spend has risen, willingness to spend dropped in the June 2000 quarter and remains quite low, contributing the moderation of spending growth observed this year.  However, with perceived financial situation good for so many people, a marked slowdown is unlikely over the next six months.

Each quarter, a random sample of 600 mainland capital city consumers are asked about their financial situation and priorities.  Consumers are classified into financial wellbeing segments:

• Going Backwards: those who feel that their financial situation is worsening;
• Struggling: those who feel that they make ends meet with nothing left over;
• Comfortable: those who have some discretionary funds for spending or saving;
• No Worries: those who can both save and spend.

The proportion of consumers who have some discretionary funds (Comfortable plus No Worries) contracted sharply in the June 2000 quarter but has since expanded to the highest level recorded since this question was first asked in the December 1996 quarter.  The contraction in the June 2000 quarter is mostly attributable to investors (affected by the April “tech wreck”) but the expansion since is very broad based.  This is a favourable reaction (so far) to the GST package of July 2000.

Consumers seem to have decided to use this improvement in their financial wellbeing to save and repay debt, rather than spend.  Consumers are asked how they would allocate a (discretionary) $1,000 between saving, loan repayment, and spending.  Marginal spending disposition dropped sharply to $300 per discretionary $1,000, from over $330, in the June quarter and has remained at this historically low level.

Combining these ability to spend and willingness to spend measures yields Spending Disposition Segments:

• Frugal Spenders have no spare cash and would not spend if they did have;
• Frustrated Spenders have no spare cash but would love to spend more;
• Reluctant Spenders do have spare cash but prefer to save or repay debt;
• Profligate Spenders have both the means and the motive to spend.

The key discretionary spending segment, Profligate Spenders, increased in size in late 1998 and, while it contracted in the June 2000 quarter, has since recovered to 22% of consumers.

Accompanying this boost in perceived financial wellbeing, price sensitivity has reduced since the June 2000 quarter.  Only 16.7% of consumers are highly price sensitive, the second lowest level recorded.

Improved financial wellbeing has combined with the first home buyers grant to stimulate intentions to borrow to buy a house – to the highest level recorded since this question was asked in the September 1994 quarter.  If this persists, the likely recovery in demand for housing finance, and dwelling construction, should also stimulate spending on furniture and whitegoods.

On a more sober note, there is a long term decline in the proportion of consumers for whom saving to buy a house is their top priority for discretionary funds.

This data suggests that it is far too early to be speculating about an interest rate cut in Australia.

Two scenarios for consumer spending suggest themselves:

1. Financial wellbeing may decline, perhaps due to rising unemployment, lagged reaction to higher interest rates, or resurgent petrol prices in the event of the onset of very cold weather in the northern hemisphere.  This would curtail consumer spending;
2. Consumers may soon feel that their financial situation (savings and debt) has been sufficiently improved and lift marginal propensity to spend.  This would increase spending growth.

My assessment is that consumer spending growth will hold up reasonably well until late 2001, by which time the lagged impact of higher interest rates will cut in.  My forecast is that this will combine with a resurgent Australian dollar, depressing export growth, to significantly slow Australian GDP growth in 2001/02.