Australian households may have a lot of debt, but they also have a lot of money sitting in bank deposit accounts. We keep a close eye on banking regulator data that discloses household deposits. At 31 December 2022, the total balance of household deposits was $1.39 trillion. It’s an impressive figure and equates to $125,000 per household, on average. On our analysis, deposits are about $16,000 per household higher than the trend line would suggest, which reflects the majority of the excess savings built up during lockdowns. More cash in the bank is supporting consumer spending and one of the reasons there is a disconnect between sentiment and spending in our view. For more on the disconnect between sentiment and spending, see this report, What correlates with retail sales? The disconnect between sentiment and spending

It is inevitable that Australian retail sales growth will be much weaker in 2023 compared with 2022. We forecast industry sales growth at 2%, down from 11% last year. Many are anticipating that retail spending will fall off a cliff. However, volumes are already weak. It is price inflation that is supporting above trend spending. We expect inflation to taper off gradually, which means a more visible downturn in retail sales in the July-December 2023 period in our view. The categories most vulnerable to an earlier slowdown are furniture, hardware and recreational goods where we forecast a decline this year. In the food sector, elevated inflation will support growth of 5% in 2023. The risks to our retail forecasts are to the upside if inflation is higher and households dip into their excess savings built up over the past three years.

The National Accounts highlights the pinch from higher interest rates starting to show through. Household income rose 3.6% in the September 2022 quarter, down from 6.5% in the June quarter. However, savings rates are the cushion that will continue for the next six months, preventing a retail sales downturn till mid next year.  Savings dropped from 8.3% in June to 6.9% in September. The stored up savings in the bank over past 2.5 years have not been used, which keeps consumers personally confident despite a multitude of macro-economic headlines that spooks sentiment. We expect a good Christmas for retail and even decent March 2023 quarter. Retail sales will slow meaningfully, just not yet.

The National Accounts for the June 2022 quarter paints a strong picture of the  Australian consumer. Despite fears about higher interest rates, the prevailing climate is one where incomes are growing faster and savings are being drawn down gradually. We expect the strength of income and savings to outweigh the headwinds for at least another six months. It is fair to caution that once the slowdown arrives around mid-2023, it could be a protracted downturn.

Australian national accounts show that the consumer still has a preference for retail spending, even as government stimulus unwinds.  Household incomes rose 4% and spending was up 7% in the March 2022 quarter. Savings are still high at 11% of income, compared with a pre COVID level of 7%. We also thought it was interesting that the recovery in non-retail spending in the quarter was not at the expense of retail spending. Compared with the US and UK, we expect a longer-dated slowdown in retail spending that timestamps the risk for 2023, not 2022.

The Australian consumer has exited lockdowns in a strong financial position. In the December 2021 quarter, household income grew 5%, which is better than long-term trends and the savings rate was 14% of income. We estimate households have $200 billion in excess savings to fund holidays and a return to normal spending patterns. This bodes well for a soft landing in retail sales for 2022.

Australian GDP fell by 1.9% in the September 2021 quarter, but the national accounts provide a more positive take on the consumer. Wages grew, savings lifted and, even with lockdowns, some areas of retail saw growth like food and online. The statistic that raises the most significant debate is savings. Household savings were 18% of income and households have saved more than $365 billion since the start of 2020. Such significant savings makes us more confident of a soft landing in retail over the next 12 months.