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Speaker 1: Welcome to the Fear and Greed summer series, brought to

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Speaker 1: you by Westpac. I'm sure ailmark consumption, of which household

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Speaker 1: spending is a big part, makes the economy go around.

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Speaker 1: It also provides ample information about the state of the

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Speaker 1: consumer and the cost of living. To get some insights

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Speaker 1: into consumption for the year ahead, I welcome Westpac Chief

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Speaker 1: Economist Lucy Ellis. Lucy, welcome back to Fear and Greed.

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Speaker 2: Thanks Sean. Always a pleasure and happy new year.

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Speaker 1: Thank you very much. Consumers, how did they end last year?

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Speaker 1: How do you think we're heading into twenty twenty six?

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Speaker 3: Sean, We saw a bit of a pickup in consumer

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Speaker 3: spending through twenty twenty five, decent growth in the third

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Speaker 3: quarter and ongoing growth according to our own data into

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Speaker 3: the December quarter. Sentiments been quite choppy and spending has

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Speaker 3: been quite choppy. People are still very value conscious and

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Speaker 3: they are still constrained by some of the increases in

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Speaker 3: the cost of living, some of the government driven price

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Speaker 3: increases water and electricity. They're the sort of things that

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Speaker 3: are crimping on people's budgets. But people do have a

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Speaker 3: bit more money to spend, and after a long period

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Speaker 3: where spending per person has gone backwards in inflation adjusted terms.

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Speaker 3: People are looking to be able to lift their spending,

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Speaker 3: but they are still a little bit constrained.

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Speaker 1: So are we over the peak of the cost of

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Speaker 1: living crisis?

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Speaker 2: We believe so.

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Speaker 3: I mean, inflation is running a lot lower than it

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Speaker 3: was a couple of years ago. And indeed, even with

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Speaker 3: that little bump that we saw late last year, people

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Speaker 3: do have a bit more money to spend as well.

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Speaker 3: So it's not just the inflation piece, it's also how

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Speaker 3: much their incomes have grown.

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Speaker 2: Over and above that. We have seen a recovery.

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Speaker 3: In incomes adjusted for inflation, and so people have got

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Speaker 3: a little bit more elbow room to spend.

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Speaker 1: Okay, So if we think of the economy as a

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Speaker 1: round circle, right, and think of a pie chart, I

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Speaker 1: suppose consumption is a really big part of that, isn't it. Yeah,

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Speaker 1: And then within that, household spending is a really big

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Speaker 1: part of it.

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Speaker 2: Yeah.

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Speaker 3: Well, that's because that's most of what households spend on.

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Speaker 3: We spend a bid on building new homes, so that's

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Speaker 3: dwelling investment, and businesses spend a bit on investment. But

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Speaker 3: households the population are what the economy is it's all

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Speaker 3: just people doing things, you know, day to day, and

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Speaker 3: that includes you know, spending on food, spending on rent,

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Speaker 3: spending on electricity, and driving their cars and going to

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Speaker 3: restaurants and buying Christmas presents, and that's all consumption.

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Speaker 1: So if that's okay, it's reasonably stable consumption, isn't it

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Speaker 1: compared to other parts of the economy.

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Speaker 3: Relative to investment. That's absolutely true. So businesses will tend

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Speaker 3: to invest more when they see the economy growing. They'll

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Speaker 3: pull right back when they see the economy weak. And

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Speaker 3: so the growth rates in investment tend to have bigger

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Speaker 3: swings than the.

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Speaker 2: Growth rates in consumption.

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Speaker 3: And you know, in economics we say that people like

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Speaker 3: to smooth their consumption. While you might have more you know,

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Speaker 3: Christmas spending or certain big expenditures, by and large, people

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Speaker 3: liked to have a sort of a fairly steady level

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Speaker 3: of consumption.

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Speaker 2: You know, they have obligations.

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Speaker 3: You've got to buy a certain amount of food, you've

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Speaker 3: got to buy a certain amount of clothes. You've got

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Speaker 3: a certain amount of streaming subscriptions that you've managed to be.

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Speaker 2: Persuaded to pay for.

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Speaker 1: That's right.

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Speaker 2: They're the sort of things that tend to be fairly steady.

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Speaker 1: Okay, and our pregum employment then plays a pretty big

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Speaker 1: role in that.

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Speaker 2: Absolutely.

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Speaker 3: Now in Australia, we've been lucky that we came out

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Speaker 3: of the pandemic with a quite high rate of employment.

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Speaker 3: The share of people with a job out of the

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Speaker 3: whole working age population, so that's everybody age fifteen and over,

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Speaker 3: including all the over sixty fives, that's actually been really

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Speaker 3: high lately. There are more older people working, There are

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Speaker 3: more women working than used to be the case ten

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Speaker 3: twenty thirty years ago. That has come off a little

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Speaker 3: bit lately, but it's still quite high. So lots of

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Speaker 3: people have jobs. But on the other hand, lots of

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Speaker 3: people needed jobs to make ends meet, and one of

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Speaker 3: the things we saw was that people were getting more

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Speaker 3: second jobs over the last couple of years in order

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Speaker 3: to make ends meet. That's starting to ease off.

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Speaker 1: Now you've just taught me something which I just never realized,

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Speaker 1: and I've studied economics. The sixty seven percent participation rate

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Speaker 1: that includes all the Australians. That's so low. Yeah, right, okay, good, No,

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Speaker 1: that's good. So consumption for twenty twenty six, do you

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Speaker 1: think we if we're over the peak of the cost

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Speaker 1: of limiting crisis, and I know your base case is

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Speaker 1: for rates to be on hold for the next feol months,

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Speaker 1: or saying what happens to consumption.

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Speaker 3: Well, if rates are pretty steady, we are seeing a

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Speaker 3: genuine cyclical upswing in consumer spending and in private sector demands,

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Speaker 3: so both households and businesses. That's already underway, so we

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Speaker 3: do expect that to pick up a little bit further

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Speaker 3: over time. If, however, the Reserve Bank does hike rates

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Speaker 3: a couple of times, that would be you know, we

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Speaker 3: would expect consumer sumption to be weaker, and we would

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Speaker 3: expect housing activity to be weaker.

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Speaker 2: So based on what.

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Speaker 3: We're expecting with a relatively steady interest rate outlook, we

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Speaker 3: would expect that to be a continued cyclical upswing to

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Speaker 3: something in the mid two percent range for growth rates.

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Speaker 2: But that all depends on, you know, what else happens.

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Speaker 1: Lucy, thank you for talking to Fear and Greed Summer series.

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Speaker 2: Always a pleasure, Shawan, Thanks very much.

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Speaker 1: That was Westpac Chief economist Lucy Ellis. Don't forget to

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Speaker 1: follow on the podcast. I'm Seanielmer and this is the

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Speaker 1: Fear and Greed summer series brought to you by West

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Speaker 1: Pact