Second half will be challenging, but there’s reason for optimism

There are many challenges facing the Australian economy over the remainder of 2022 but the good news is we are better placed than many other countries to deal with higher than expected inflation and increasing interest rates over the next few months. 

The latest Roy Morgan Poll shows the ALP Government led by Prime Minister Anthony Albanese is well within its ‘honeymoon period’ with a two-party preferred lead of ALP 53.5% cf. Liberal-National 47.5% – in increase of 1.4% points since the Federal Election in May. 

Roy Morgan’s Government Confidence Rating measures whether Australians think the country is broadly going in the right direction and is in positive territory at 107.5, above the neutral level of 100 and well above its level pre-election when it languished at around 80 – far into negative territory. 

Of greater concern is the low ANZ-Roy Morgan Consumer Confidence Rating which was at 84.7 in late June and has now been below the neutral level of 100 since early March nearly four months ago. The low level of Consumer Confidence indicates Australians are worried about the prospects for their personal finances and the economy over the next few months. 

This low rating is clearly being driven by rising inflation and the RBA’s decision to begin increasing interest rates for the first time in over a decade. This is borne out by looking at Consumer Confidence by Housing Status – by far the biggest decline since the RBA switched to a tightening bias has been among Australians with mortgages – down by around 25pts among this group. 

Consumer Confidence has also dropped amongst renters and outright home owners but by nowhere near as much since late April after the ABS released higher-than-expected inflation figures. 

The concern about the rising inflation is clearly expressed in the weekly ANZ-Roy Morgan Inflation Expectations Index – now at 5.7% and on the way up after a brief reversal after the cut to the petrol excise by former Treasurer Josh Frydenberg. 

Although this data is concerning, there is some good news as well. Mortgage atress in Australia has been at record lows during the last two years and as recently as March 2022 only 17.5% of mortgage holders were considered ‘At Risk’ – less than half the rate during the Global Financial Crisis (35.6%). 

Even accounting for official interest rates increases of 1.75% since March (including expected interest rate increases of 0.5% in both July and August) the expected level of mortgage holders ‘At Risk’ will increase to around 19.4% – still well below the levels during the GFC and also the European sovereign debt crisis of 2011-12 when well over 25% of mortgage holders were considered ‘At Risk’. 

Looking forward Roy Morgan’s forecasts on ABS Retail Sales over the next few months expect annual growth of +9.7% in June, +9.9% in July, +11%-12.8% in August and +7.9-10.6% in September – very strong annual growth figures. These projections suggest ABS Retail Sales in these months will average around $33 Billion – similar to the level of retail sales seen so far this year. 

This suggests that while growth will moderate over the next few months the overall sales results are likely to hold up relatively well despite the high inflation and the expected increases to interest rates. 

Forecasts for the end of the year and the all important Christmas retailing season are not yet available and will depend upon the course of economic events and how far the RBA’s interest rate cycle continues. 

What is behind this strength? It is the huge build up in financial assets.  

In March 2020 Australians had a total of $10.6 trillion in personal financial assets, up by $1.27 trillion (+13.5%) from two years earlier pre-pandemic. Comparatively this represents a huge increase over a two-year period. In the two years prior to March 2020 total personal financial assets increased by around $300 billion. 

It is this large buffer of savings and other financial assets built up during the pandemic that the RBA is relying on supporting the economy over the next 6-12 months even as they increase interest rates. 

So far this assumption has proven correct with ABS Retail Sales data remaining strong in the first month after the RBA started increasing interest rates. 

The key for the RBA is not to increase interest rates too far so that this buffer of personal financial assets is eroded and spending slumps later in the year and into next year. 

It may be some time before we know whether the RBA has struck the right balance and doesn’t lead Australia into the ‘recession that we don’t have to have’. 

Julian McCrann is Industry Communications Director with Roy Morgan. Roy Morgan are partners of the Australian Retailers Association. 

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