The Bubble Down Under (one of several posts to follow)
Consumers prepare to peg back spending
By Peter Weekes
Personal Finance Reporter
September 20, 2003
DVDs could be hanging on shop shelves for longer if the RBA raises interest rates next month.
Christmas stockings this year may be a bit lighter, with a survey revealing Australia's consumers are ready to cut back on spending if interest rates rise.
The survey, by mortgage broker Wizard Home Loans, gives an insight into the minds of home-loan borrowers rather than the predictions of economists. It reveals that almost half are convinced rates will rise after the Reserve Bank meets next month.
Half the respondents said that if rates rise by 1 percentage point, they would cut back spending on luxury items such as pay TV, DVDs, cigarettes and alcohol, while 10 per cent would cancel their annual holidays.
Perhaps surprisingly, 8 per cent saw private health insurance as discretionary, and would let their cover lapse. About 6 per cent would reduce spending on basic items such as groceries.
A Bloomberg survey of 20 economists this week expected the RBA to raise rates by only a quarter of a percentage point and not until the second quarter of next year.
Retail spending and the property boom have underpinned the strong Australian economy and insulated it from the effects of the global turndown, severe acute respiratory syndrome and the war in Iraq.
"Consumer spending represents almost two-thirds of gross domestic product," says Gordon Alexander, chairman of Idea Works, an advertising and marketing company specialising in Australian retail.
"The Australian economy has been remarkable in passing through two wars and the SARS virus without a hiccup, and that has really been driven by consumer spending."
Mr Alexander says while an interest rate increase would reduce people's disposable income, small incremental rises would not have a "massive impact" on spending.
"What we do know in terms of behaviour, is that when people get more money they tend to increase their expenditure," he says. "However, when they get less money they don't actually change their behaviour to the same degree. They don't let go of their standard of living, they find ways to adjust."
Consumer spending represents almost two-thirds of gross domestic product.
An interest rate rise of 1 per cent would increase mortgage payments by $166 a month on a $200,000 loan.
"We would see less impact on retail spending with a small rise, than we would see an increase in spending with a small decline in rates," Mr Alexander says.
Seventy-four per cent of those surveyed said they would make minor changes in their household spending if rates increased by 1 percentage point in the next year.
"The word minor is very important here," says Lisa Montgomery, Wizard head of consumer information and advocacy.
"That tells us that people are not panicking and that there is a level of confidence among borrowers that they haven't overextended themselves."
The survey also showed borrowers were considering their financial position in the event of a rate rise, with 66 per cent saying rates would have to rise at least 2 percentage points before repayments became a problem.
"The scale of Australian debt is such that it would only take a slight movement to have a significant economic impact, so in our view borrowers will not see rates return to the dizzy levels we experienced 15 years ago," Ms Montgomery said.
theage.com.au |
