‘Thoughtful spending’: Coffee and takeout under threat but children and pets safe

On Tuesday mortgage holders will get their answer on whether they will take a hit from the Reserve Bank with another interest rate rise. The odds favour a quarter of a percentage point rise, but there is some possibility the RBA will keep rates steady – and an outside chance it will be larger.

Even before Tuesday’s rate decision, the annual repayments on a $758,000 mortgage will have climbed by almost $16,000 since last May.

Takeaway coffee is one treat consumers are willing to avoid as cost of living bites

It’s been nine months since consumer sentiment plunged into the statistical abyss. But during this period consumers have weathered eight rate rises and a rampant rise in the cost of living yet continued to spend.

There is generally a lag between consumers feeling nervous about their financial position and responding to it – but it usually isn’t this long.

Economists put this down to the elevated level of household savings, strong employment and an unusually large number of households still on low fixed-interest mortgages. Two and potentially three of these elements are under threat in 2023.

All economists acknowledge that the consumer spending dam is close to breaking. Another increase in rates on Tuesday will further increase this strain.

National Australia Bank’s latest consumer sentiment survey found there are at last signs that consumers are altering their spending habits. They are not zipping their wallets shut but selectively choosing where to cut back on spending.

So, which businesses are safe and which are vulnerable?

The low-hanging fruit for the family budget is what NAB describes as micro treats – the most vulnerable is the daily takeaway coffee and buying lunch. Another, according to the survey, is petrol, leading people to reduce car trips.

NAB describes the emergence of “thoughtful” spending, which suggests impulse buying won’t feature in a more constrained household budget.

One third of respondents were cutting back on some kind of entertainment such as going to the movies and using food delivery services such as Uber Eats.

All economists acknowledge that the consumer spending dam is close to breaking.

About one third of people had cancelled travel plans or opted for a more modest holiday, dumped or delayed buying a big-ticket house item such as a television or washing machine or had cut back on charitable giving. They are also thinking twice about home renovations.

Curiously, a number of categories look to be spared the spending axe.

Chief among them is the children and their education. This conforms with previous periods of tight household budgets when people become highly disinclined to avoid shifting their children from private schools.

When household budgets are tight, Even as the cost of living bites, parents are keen to retain the kids’ tutors and want to continue with the children’s sports, hobbies and other activities.

The fact that households are reluctant to reduce their spending on pets is further testament to their role as family members. So, the pooch parlours, vets and suppliers of animal vitamins are in the clear for now.

What is perhaps more surprising is the tenacity with which people want to retain help with household services. It looks like the cleaner, the gardener and the pool cleaner are safe for a while yet.

People are also holding on to spending on personal fitness, so maybe the gym membership or personal trainer have some protection.

Not surprisingly, healthcare, food and insurance are viewed as less discretionary, according to NAB’s survey of spending intentions.

But the notion of value has crept in. Consumers are more actively looking for bargains, which explains why November’s cybersale events were particularly strong.

Meanwhile, other factors are increasingly creeping into how consumers choose what to buy, including a desire to buy Australian made and use suppliers that demonstrate good ESG (environmental, social and governance) credentials.

But as belts continue to tighten, this may come under threat.

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