Consumers cautious with ‘cash splash’

Rarely has the situation confronting Australian consumers changed so dramatically as in the past few months as COVID-19 morphed from a distant threat into a global health and economic crisis.

As our recent Red Book analysis details, picking through the wreckage shows positives – consumers’ long term expectations for the economy remain relatively well anchored – but also more concerning signals, such as the spectacular unravelling in housing-related sentiment.

The bottom line is that 2020 will see the Australian economy suffer its first recession in nearly 30 years and consumers sit at the centre of these difficult times. 

Sizing the consumer impact isn’t straightforward. 

COVID-19 is set to have economic impacts unlike any shocks or cycles we have encountered since modern macroeconomic measures were developed last century (the Spanish influenza in 1917-18 predating most of the common measures we use today).

But just as the shock is like nothing before, so too is the policy response from governments and central banks. 

The centrepiece from the federal government that we believe will be a game changer for the jobs market is the $130 billion JobKeeper Payment scheme, with $1500 a fortnight payments to eligible employees starting to flow from May, and adding to a raft of direct stimulus payments to households. While the scale of payments is similar to those rolled out during the GFC (remember the $900 one-off cheques in the mail), total fiscal stimulus as a percentage of GDP is far larger now than it was back then. 

But with many businesses still shut, pantries fairly full post panic buying and economic uncertainty very high, what’s everyone going to do with the stimulus cash? 

Based on a question we ask consumers in our monthly Westpac Consumer Sentiment Survey, it appears consumers are taking a much more restrained approach to the “cash splash” than during the GFC. 

Whereas nearly two thirds of recipients spent all of the money in 2008-09, barely a quarter plan to do so in 2020. Breaking it down, 27 per cent planned to spend all of the cash and a further 20 per cent planned to spend more than half, 36 per cent planned to spend less than half and 16 per cent none at all. 

Surprisingly, the results suggest the propensity to spend is likely to be uniform across states and sub-groups, with those on lower incomes – three quarters of whom stand to receive a payment – only slightly more inclined to spend than others. Interestingly, those in lower age-groups, where labour market impacts already look to have been relatively much heavier, are less inclined to spend their fiscal payments.

Long story short, Australian consumers – a critical and large part of the economy – are seemingly looking to stretch their stimulus cash rather than splurge, meaning much of the boost will be saved initially.

It seems not even weeks of being cooped up inside is enough to ignite a spending spree in this crisis. 

_{This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.}