Introduction

Some of the hardest hit areas from the COVID-19 pandemic so far have been those related to consumer spending, especially in consumer services. Government mandated shutdowns and self regulation from households have led to some permanent changes in consumer spending patterns and accelerating trends that were already happening, such as an increase in online shopping (which hit 11% of total retail spending in Australia at its peak versus 7% pre-coronavirus although it was already trending up) rather than in-store retailing and the consumption of online rather than in-person services like fitness and telehealth. Other behavioural changes like lower spending on eating out, recreation and travel in favour of household goods furnishings are temporary, but will take a while to recover back to pre-COVID levels. The outlook for overall consumer spending depends on the virus case count (which determines mobility) and consumer incomes which are determined by the labour market and government support payments. In this Econosights, we detail the outlook for consumer spending, as it primarily relates to Australia.

The backdrop

Since the onset of the COVID-19 pandemic in Australia (in mid-March), the value of employee wages and salaries have fallen (even accounting for the impacts from JobKeeper) because of falls in employment but government-related handouts and policies have more than offset any loss in total wages (see chart below) for the average household in Australia. So total consumer incomes have have actually improved over the past six months, by a net amount of around $5000.

A similar story is also evident in the US. US consumer disposable incomes are up by 8.9% over the year to June (after reaching a peak of +16.8%yoy in April) versus pre-COVID growth of around 4% per annum. This has been driven by government payments. Disposable income without government benefits is down by 2.8% over the year to June.

This government-driven income windfall along with the recent drop in consumer spending has lead to a rise in the consumer savings rate. This is already evident in the US (see chart below), with the savings rate averaging 26% in the June quarter from around 7% pre-pandemic. Australia is likely to have seen an increase in the savings rate to around 10% in the June quarter from around 5% before the pandemic (the data hasn’t been released yet).

But, the savings rate is likely to decline again from here as households use the build-up in savings for consumption, as income growth is expected to slow down. The boost from government payments will fade. Wages and salaries will remain under pressure as employment growth is likely to remain low (with Victoria adding another negative to the labour market) and the official unemployment rate is expected to increase to around 9.5% 10% by the end of the year from 7.5% currently. Growth in total wages and salaries is only expected to turn positive on an annual basis in mid-2021.

JobKeeper has been extended until March 2021 (and it wouldn’t be surprising to see another extension) and will help to keep the unemployment rate lower than it otherwise would have been (without JobKeeper the unemployment rate would be at 10% or higher versus its current level of 7.5%). But, the payment rates for JobKeeper have been lowered starting from October (from $1500 per week to $1200 for those working 20 hours or more per week and to $750 for those working less than 20 hours) and will be dropped again again in January (to $1000 per week for those on 20+ hours and $650 for those on less than 20 hours). The unemployment benefit Coronavirus JobSeeker supplement has also been extended until the end of the year, but also at a lower rate (from $550/fortnight to $250/fortnight). And it will be a bit harder for companies to access JobKeeper from October.

The banks have extended the mortgage payment holidays until early 2021 (but with some tougher eligibility criteria) but the other government payments were one-offs. So, the current rise in savings will be necessary to offset any forthcoming weakness in income from declining government support payments. This profile for household incomes over the next year means that we expect annual growth in consumer spending to only turn positive in mid 2021. But within the outlook for consumer spending, there are many moving parts as COVID-19 has resulted in new spending behaviours and patterns.

COVID-19 and consumer spending patterns

The biggest and most permanent impact on consumer spending from COVID-19 will be on travel, recreation and eating out (which is chunky at around 16% of total spending). In Australia, while travel is severely restricted and some recreation activites are closed, growth in consumer spending will be constrained. There may be some offsets. Offshore travel will be replaced with domestic travel. Eating out will be replaced with takeaway food. Public-based recreational spending will be replaced with home-based activities. But it’s unlikely that this change in spending will completely return to its total pre-COVID amount, especially while the unemployment rate is rising.

The strengh of the recovery in Australian retail sales has been surprising. The pandemic has boosted spending on “home” based items like groceries, house furnishings and equipment. This has come at the expense of lower spending on discretionary items like clothing and footwear, department stores (which were already in decline before the pandemic) and eating out (although spending in these areas has seen a big lift in the July data) – see the chart below. These substitutions in spending are partly temporary, but also have somer permanence to them. Ongoing large rises in household goods spending is unlikely to continue (except for Victoria given the lockdowns) as spending on durables has been brought forward. And spending on eating out is unlikely to fully return to its pre-COVID levels just yet.

Retail sales only make up about 30% of consumer spending and therefore does not tell the complete picture of household consumption because it excludes travel, recreation and personal services spending. We expect total consumer spending to remain 5 10% below its pre-COVID levels until the second half of 2021 before some recovery from there as travel restrictions are lifted and there is an improvement in consumer incomes from a falling unemployment rate.

China is a good example of weakness in the retail sector because fiscal stimulus has been focussed to the industrial sector, rather than to consumers. Retail sales are still lower compared to a year ago (down by 1.1% over the year to July) and have a long way to go to get annual growth back to pre-COVID levels of around 8% per annum (see chart below).

Implications for investors

Weakness in consumer spending in Australia 2020/21 will constrain GDP growth as consumption is worth close to 60% of GDP. Interest rates and bond yields will remain low in this environment. Business earnings which are tied to consumer recreation, travel and personal services will remain under pressure until more reliable treatments for COVID-19 are available. Traditional shopping centre real estate assets may be forced to consolidate as consumer spending remains below its pre-COVID levels for the near-term.