5 minute read 6 May 2021
 housing-economy

Nervous households could rattle economic recovery

Authors
Marc L’Huillier

EY Oceania Customer Strategy and Consumer Insights Leader

Customer Strategy. Accelerating Growth. Consumer Insight Expert. Thought Leadership Author.

Lisa Nijssen-Smith

EY Oceania Consumer Products & Retail Leader

Retail, consumer, tech and media focus.

5 minute read 6 May 2021

Australia’s economy set for a $5.5 billion hit as households opt to save instead of spend. 

In brief

  • While household spending has helped drive the post-COVID economic recovery, financial anxiety looms as a headwind.
  • The highest level of financial anxiety are reported by the largest spending group, households with dependant children, and a drop in their spending could cause a $5.5 billion economic hit.
  • Over the longer term, consumers will seek brands with purpose and sustainability. Retailers need to be ready to take advantage of these changing habits. 

Australia’s post-COVID federal budget is likely to be about $55 billion better off than initially expected, according to preliminary estimates, which is a strong signal that the country’s economic response to the pandemic has been impressive. Much of the economic rebound has been driven by households, with families spending upwards of $310 billion a year on goods and services.  

But, recent data from the Future Consumer Index highlights possible deep and sustained shifts to spending behaviours amongst some of these biggest groups and rising financial anxiety, despite the successful recovery so far.  

It means that the household consumer engine room may not be as strong a support for recovery as hoped, and the Federal Government and business could need to adjust their expectations of, and approach to, Australia’s ongoing economic performance.  

Where the COVID-19 recession differed to previous downturns was in the impact of direct federal payments that benefited consumers. The scale of JobKeeper and JobSeeker payments, among other measures, meant that household disposable incomes actually rose during the pandemic, which meant there was no income recession in 2020, and households were able to spend, as well as save.  

“Within that spending there was a shift towards goods, and away from services, for example renovating or buying new furniture instead of going on holiday,” EY Oceania Chief Economist, Jo Masters, says.

Now the Federal Government support has largely come to an end, households are again facing weak wage growth, which was soft prior to COVID but has now hit fresh historic lows.

“The question is, to what extent does any household run down the savings they’ve built up, in order to smooth consumption, or do they cut their consumption and hold on to those savings.” 

The household saving rate peaked at 22 per cent of disposable income in the June quarter of 2020 and then dropped to 12 per cent at the end of 2020, which is still higher than during the GFC when the saving rate peaked at 11 per cent. The unknown factor is whether that saving rate will fall further now the federal stimulus packages are being wound up, although Masters notes that households still have $125 billion more cash in the banks than they did before the pandemic.  

“Different households will do different things but what the Future Consumer Index data shows us is that if there is a group more likely to cut spending than drive down their savings, it’s families with dependent children,” Masters says.

To date, roughly 2.1 million couples with dependent children spend about $240 billion on goods and services each year, while single parent families spend about $70 billion. Of that combined spend about $110 billion goes directly to discretionary goods and services* including cars, clothes, holidays and cultural and leisure activities.

More than 35 per cent of households with dependents indicated they were saving more to prepare for the winding down of the Federal Government JobKeeper and JobSeeker stimulus in late March, compared to the national average of 22 per cent.

Assuming about half of all dependent households act on their concerns about future financial security and cut their discretionary spending by 10 per cent, that translates to a $5.5 billion hit to the economy over the next 12 months.

Lingering consumer impacts still to play out

EY Partner and Consumer Insights Lead, Marc L’Huillier, says that while we have seen confidence rise as the pandemic’s impact on daily life has tapered, an undercurrent of anxiety still prevails.

“The emotional impact of the pandemic on people was pronounced and we are only starting to understand how that legacy will play out. Many Australians were hit hard quite quickly or were bracing for the hit for an extended period. They’ve become much more introspective, thinking markedly differently about the future. Many still remain wary about what lies ahead, even as they start to enjoy many aspects of life again and release the pent-up consumer demand.”

L’Huillier says families with dependent children will have a long memory of the emotional tumult of 2020 and will remain guarded. “They are at a point in life where they are one of the most exposed segments and that sense of vulnerability is ever present, even when all the talk may be about the momentum in the economy.” 

“The sense of unease goes up a level for those who have seen key job-related government support for their employer dialled down or switched off. That translates to different behaviour as well as a continuation of the desire to create a financial buffer for the household – something that is hard for the large tranches of Australians who live pay-to-pay.”

L’Huillier also says people are looking at the way they spend their time and money, challenging things they may have done by rote in the past. “The reality is that Australians thrive on certainty and that’s not there yet for some of the segments that feel most susceptible. We’ll continue to see these people downshifting spend, remaining cautious and reflecting where they spend their money. As more stability returns in the longer term, across the wider consumer base we'll also see a much more assertive consumer when it comes to key areas like sustainability and the extent to which brands and organisations demonstrate the right values. The most valuable competitive edge today will come from knowing your consumers better than your competitors."

How smart retailers will pivot

Based on historical data, households with dependants are estimated to spend about $33 billion each year on recreational activities. Again assuming half that cohort curbs their spend by 10 per cent, that represents a $1.65 billion drop in revenue for businesses in that sector. Analogous numbers for clothing and footwear are $9.5 billion with a dip of $475 million, and for household furnishings and equipment, $12.3 billion with a dip of $615 million.

EY Oceania Consumer Products and Retail Leader, Lisa Nijssen-Smith, says the challenge facing retailers will be how they identify which section of your customer base are the consumers that will keep spending, versus those that are likely to increase savings. “Once you’ve identified those cohorts, how do you draw out the ones who would tend to save, and get them buying what you’re selling?”

One way to do this might be to appeal to households wanting to balance their desire for societal good, with their increased focus on financial spending and pressures. Already, there is a shift for this demographic towards tightening their purse strings and opting for products and brands that align with an increasing focus on value and discretion. 

 “The data shows that while this group wants to facilitate positive societal outcomes they lag behind other demographics when it comes to paying a premium to ensure that positive outcome,” Nijssen-Smith says. “Brands that can create products or services that do good, but aren’t too expensive, will increase their market share.”

*Note: Discretionary spending is classified as: alcoholic beverages, tobacco products, clothing and footwear, household furnishings and equipment, purchase of private vehicles, transport services (i.e. biggest cost is air travel but also includes public transport), recreation, personal care, miscellaneous goods and services.

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Summary

Households with dependents are nervous about spending now Government stimulus has ended. The question for retailers is will they taper or go cold-turkey on discretionary purchases?  

About this article

Authors
Marc L’Huillier

EY Oceania Customer Strategy and Consumer Insights Leader

Customer Strategy. Accelerating Growth. Consumer Insight Expert. Thought Leadership Author.

Lisa Nijssen-Smith

EY Oceania Consumer Products & Retail Leader

Retail, consumer, tech and media focus.