{"id":8112,"date":"2023-08-07T12:01:42","date_gmt":"2023-08-07T02:31:42","guid":{"rendered":"https:\/\/adelaideprivatewealth.com.au\/australias-painful-squeeze\/"},"modified":"2023-08-07T12:01:42","modified_gmt":"2023-08-07T02:31:42","slug":"australias-painful-squeeze","status":"publish","type":"post","link":"https:\/\/adelaideprivatewealth.com.au\/australias-painful-squeeze\/","title":{"rendered":"Australia\u2019s \u201cpainful squeeze\u201d"},"content":{"rendered":"
Australians are experiencing tough times. \u00a0Every trip to the supermarket leaves us leaner and poorer in terms of our purchasing power. The $20 note barely covers a bottle of milk, a loaf of bread and a carton of eggs.<\/p>\n
When you arrive home, you are afraid to switch on the heater and lights given the costs. For many, the cheaper and safer choice is to crawl into bed early, pull the blanket over and then try to dream of better days ahead. \u00a0<\/p>\n
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High inflation is clearly a global problem. Yet Australia\u2019s inflation has local consequences. The consumer has become very cautious in spending because our budgets are stretched to breaking point. This has implications for Australia\u2019s economy, house and share prices as well as our health and wellbeing.<\/p>\n
Our central bank, the Reserve Bank of Australia (RBA), seems aware of these challenges. The RBA Governor noted in June that the \u201ccombination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending \u2026 some households have substantial savings buffers, although others are experiencing a\u00a0painful squeeze\u00a0on their finances<\/em>.\u201d<\/em><\/p>\n However, the question needs to be asked:\u00a0Is the RBA mindful of how dramatic this \u201cpainful squeeze<\/em>\u201d really is?\u00a0Some fortunate few may have \u201csavings buffers<\/em>\u201d, but the \u201cothers<\/em>\u201d are many and rapidly growing in numbers.<\/p>\n The Consumer Price Index (CPI) displays these painful price pressures (Chart 1).\u00a0 In the year to April, electricity prices have risen by 15.2%, food products by 11.7% and rents by 6.1% according to the Australian Bureau of Statistics (ABS)1<\/sup>. Yet this data does not fully reflect the reality on the ground. Given the delays in capturing new rentals which are rising at a +10% annual pace according to CoreLogic, the reality is that renters are being hit hard.\u00a0 Notably 31% of Australian households are renters \u2013 so this rental squeeze impact is hardly just \u201csome<\/em>\u201d households.2<\/sup><\/p>\n Chart 1 \u2013\u00a0Australia\u2019s painful price pressures<\/strong><\/p>\n Source: ABS.<\/span><\/p>\n The \u2018painful squeeze\u2019 is also evidenced by the wide gap between Australia\u2019s CPI inflation rate at 6.8% and wages growth running at 3.7% in the year to March (Chart 2). Effectively worker\u2019s wages have failed to keep pace with inflation. This \u2018inflation \u2013 wages gap\u2019 has been the reality for the past two years. The toil of work has provided little compensation for the reality of higher consumer prices.\u00a0 Admittedly a 5.75% increase in award wages was announced on 2 June, which applies for the coming financial year3<\/sup>. However, this award wage rise only directly benefits \u2018some\u2019 20% of the workforce. \u00a0Even so, rising wages have not fully compensated for the recent inflation experience. Hence the \u2018wage slave\u2019 status still applies for all too many.<\/p>\n Chart 2 \u2013\u00a0Australia\u2019s inflation rate vs wages growth<\/strong><\/p>\n Source: ABS.<\/span> The RBA is just one of many central banks such as the US and European central banks to aggressively raise cash interest rates to curb inflation. The RBA\u2019s cash interest rate has risen from 0.1% to 4.1% in the past year. Hence another price being paid for higher inflation is rising housing interest rates. The direct impact is that Australia\u2019s variable mortgage rate has more than doubled from 2.9% to circa 7% for \u2018owner occupiers\u2019 (Chart 3).\u00a0 Similar pain has been felt by investors with housing loans.<\/p>\n For now, \u2018some\u2019 fortunate fixed rate borrowers who borrowed at the available 2% interest rate back around 2021 have been insulated from rising interest rates. However, these fixed loans are approaching their \u2018use by date\u2019, so these borrowers face a \u2018sticker shock\u2019 of moving either to a 6% fixed or 7% variable rate. Effectively this is known as the \u2018mortgage cliff\u2019 as fixed rate borrower\u2019s budgets plunge into an abyss.<\/p>\n Chart 3 \u2013 Australia\u2019s cash interest rate vs home loan rates<\/strong><\/p>\n Source: RBA.<\/span><\/p>\n This \u2018painful squeeze\u2019 of higher interest rates is exacting a toll on consumer spending and housing construction. The most recent National Accounts showed that household consumption spending barely increased by only 0.2% in the March quarter while housing construction and alterations fell by -1.2% (Chart 4)4<\/sup>. Consumers are reducing demand for goods and services as well as housing because of the squeeze on purchasing power. The savings rate for households has fallen to 3.7%, the lowest since June 2008. There is also angst to come with further price rises. The proposed +20% lift in electricity prices in the new financial year will further challenge our budgets on whether to keep the lights on and the heater going.<\/p>\n Chart 4 \u2013 Australia\u2019s GDP spending components<\/strong><\/p>\n Source: ABS.<\/span><\/p>\n For the broader Australian economy, this challenging mix of high inflation and rising interest rates on the consumer suggests that the Australian economy will struggle over the next year. There is some good news even amidst these difficult times.\u00a0 Firstly, the jobs market remains remarkably strong with solid jobs growth and high vacancies. This suggests that some workers have the bargaining power to negotiate higher wages, more working hours or even both.\u00a0 The spectre of underemployment \u2013 where part-time workers could not get sufficient hours \u2013 is essentially at a 15 year low of 6.1%. Unemployment at 3.7% is also at multi-decade lows.5<\/sup><\/p>\n Secondly, the Federal Government\u2019s Budget is on a path to record its first surplus in 15 years.\u00a0 While this may be a temporary windfall given the strong jobs market and commodity prices, this does give the Federal Government more scope to alleviate the pain of high inflation and interest rates.\u00a0 More government support measures for low-income households are clearly needed as noted by the Australian Council of Social Service.6<\/sup><\/p>\n Finally, our financial challenges can be made more tolerable by focusing on family and friends rather than the ebbs and outflows of our bank accounts.\u00a0 Our dinners may feature more of the cheaper cuts of meat and vegetables as well as the occasional wine \u2013 but this can be more than made up for by spending more time on conversations rather than crying into your pretzels7<\/sup>.<\/p>\n If you need help with your finances, call us today.<\/p>\n Source: MLC<\/a><\/p>\n 1\u00a0Monthly Consumer Price Index Indicator, April 2023 | Australian Bureau of Statistics (abs.gov.au).<\/a><\/span><\/p>\n 2\u00a0Housing Occupancy and Costs, May 2022\u00a0| Australian Bureau of Statistics (abs.gov.au).<\/a><\/span><\/p>\n 3\u00a0Australia\u2019s minimum wage jumps by 8.6 per cent, award workers get 5.75 per cent pay boost, Hutchens, G & Chalmers, S, ABC News<\/a>, 2 June 2023.<\/span><\/p>\n 4\u00a0Australian National Accounts: National Income, Expenditure and Product, March 2023 | Australian Bureau of Statistics (abs.gov.au).<\/a><\/span><\/p>\n 5\u00a0Labour Force Australia, April 2023, Australian Bureau of Statistics (abs.gov.au).<\/a><\/span><\/p>\n 6\u00a0\u2018Governments must do more to provide relief to people on low incomes struggling with the cost of energy bills<\/a>\u2019. Australian Council of Social Service, Media release, May 25, 2023.<\/span><\/p>\n 7\u00a0\u201cSoggy Pretzels\u201d lyrics, Neil Diamond, Hot August Night album, 1972.<\/span><\/p>\n Important information and disclaimer<\/span><\/p>\n This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at June 2021 but may cease to be accurate in the future.<\/span><\/p>\n NULIS is part of the group of companies comprising IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate (IOOF Group).<\/span><\/p>\n Opinions constitute our judgement at the time of preparation. In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way.<\/span><\/p>\n To the extent that the information in this article is or contains advice, it does not take into account any particular person\u2019s objectives, financial situation or needs. Before acting on the information, you should consider the relevant Product Disclosure Statement, consider the product\u2019s appropriateness to you having regard to your personal objectives, financial situation and needs, and consider obtaining independent advice. The Product Disclosure Statement for the MLC Super Fund is available at https:\/\/www.mlc.com.au\/personal\/superannuation\/products or can be obtained by calling 132 652 (Monday to Friday between 8am and 6pm AEST\/AEDT). Returns are not guaranteed and past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the IOOF Group accepts responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.<\/span><\/p>\n The post Australia\u2019s \u201cpainful squeeze\u201d<\/a> appeared first on MLC Contemporary<\/a>.<\/p>\n<\/div>\nEverything is going up except our confidence<\/h3>\n
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\u00a0<\/p>\nThe RBA continues to turn the vice by pushing interest rates higher<\/h3>\n
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\u00a0<\/p>\nAre there any hopeful signs?<\/h3>\n
<\/strong>References<\/span><\/strong><\/p>\n