Day and night, we are surrounded by media reporting on gloomy economic realities and concerns that inflation will reach a 32-year high, increasing interest rates and jittery investment markets.
A growing number of economists are predicting a US recession is on the cards, which could lead to a recession in Australia and other countries around the world.
Australians are becoming increasingly worried. Consumer confidence – our primary indicator of how optimistic or pessimistic consumers are regarding their expected financial situation – dived early in the year and is hovering near historic lows of 85pts in October 2022, compared with 106pts in October 2021.
The economic environment and consumer behavior
The fascinating thing is, that while households in Australia are concerned about the financial environment, to date, it has had almost no impact on their spending habits.
On the contrary, we are witnessing a 28 percent increase in household consumption across states and territories in all consumer categories.
According to the Australian Bureau of Statistics in October 2022, household spending increased for both services (up 45.3 percent) and goods (up 15.3 percent), with the highest increases in clothing and footwear, hotels, cafes and restaurants, recreation and culture.
There was also significant growth in transport, driven by higher petrol prices and demand for air travel.
Here, the strongest increases were seen in the Australian Capital Territory (up 46.7 percent), New South Wales (up 42.3 percent) and Victoria (up 33.5 percent) indicating that people are eager to dine out, shop and travel overseas.
Spending is high but confidence is low
Despite the current challenges and concerns for the economic outlook, the Australian economy grew strongly this year and is in a relatively robust shape. This in turn led to a thriving job market, with the workforce participation rate rising to a record high and the unemployment rate falling to a near 50-year low in Australia.
This gives people the confidence to spend.
The level of confidence and optimism is strongest among the higher income segments and across the older and younger generations. Gen X is an exception here, creating a notable “hump” in pessimism, which could be explained by the likelihood that those consumers are at the peak point of mortgage stress.
There is also the phenomena of ‘inflationary psychology’ – consumers expect future prices to be higher than they are at present, thus creating less short-term resistance to spending.
Lastly, as we come out of the pandemic people are craving more human connection. As one of our Flight Centre Card customers mentioned in a recent survey: “We only live once, and we already lost two years. I want to live a full life and create magical moments with my kids while travelling.”
How consumers pay for their spending
Household saving – that is how much we save out of household disposable income – increased sharply during the Covid-19 crisis, due to a reduction in consumption and government income support packages.
Now, however, we have witnessed a significant drop in consumer savings ratio over three consecutive quarters, from almost 20 percent in 2021 to 8.7 percent.
With people spending more and saving less, it means Australian consumers will be looking for finance options that make it more affordable for them to access the products and services they want, while having peace of mind and managing their finances better.
This is supported by data we are seeing across our buy now pay later (BNPL) and Humm Group credit card products.
As Australians indulge in their love of shopping and travel, we have seen a five percent growth in overall humm90 Card and Flight Center Card volumes between Q1 FY23 and Q4 FY22. We expect this trend to continue on its current trajectory.
There is significant growth in the BNPL space, too, with humm Big Things continuing to go from strength to strength as we expand our payment solutions to include healthcare, solar batteries, IVF treatments and automotive verticals.
Future trends
With the eagerness for a return to normalcy, it seems that the desire to create new experiences, be pampered and shop for little luxuries is here to stay. However, we expect consumers to become more financially conscious and focused on value for money.
Financial institutions should adopt the framework of responsible lending as their North Star, including principles of transparency, fair treatment, helping customers to manage their finance better, stay in control and responsible credit decisions for new customers.
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