WA Economy

Last issue, I discussed rising inflation and the RBA's response by raising interest rates. The main reason for high inflation, apart from global conflict, is that consumers have been spending a lot of money, a lot more than usual - on all goods and services.

The ABS produces a monthly retail trade data series of consumers spending patterns in six broad categories. Food, household goods, clothing, department stores, other (books, cosmetics, recreational goods) and cafes and restaurants. WA households had been spending at subdued levels since the end of the mining investment boom in 2014. Growth in total sales in the six and half years between August 2014 and December 2019, just before the pandemic hit, was an anaemic 7¼ per cent. In the two and half years since then, retail trade has grown by over 30 per cent. In the 12 months to August 2022 alone, spending increased by around 8 per cent despite recent rate rises. The pandemic seems to have changed consumer behaviour from cautious to supercharged. Spending has averaged $3.5 billion per month just on those 6 categories.

When holiday travel stopped dead during the pandemic, households diverted that income to household goods as they spruced up their homes and fitted out WFH offices. Spending on household goods and electronics, having fallen by over 11 ½ per cent between 2014 and the start of the pandemic has surged by over 37 per cent since then. The thinking seems to be, "If we are going to be stuck at home, we may as well make it nice." Most consumers in other locked down countries did the same. Stock quickly disappeared from shelves and warehouses. Getting more meant competing with consumers all over the world just as factories everywhere slowed production due to covid restrictions. A significantly larger pool of funds and a shrinking pool of goods on which to spend it. Classic textbook demand-pull inflation.

Look at the housing sector. The very generous pandemic-era government grants for building new homes were designed to support the construction sector. Up to $55,000 was available to build a new house. A record 56,000 new dwellings have been approved in WA since January 2020. Growth topped a staggering 175 per cent.

This sudden surge in demand has meant building materials and labour were and remain in short supply, driving up prices. The cost of building a new home in WA has increased by 39 per cent since the end of 2019. Most of the grant went straight to higher prices leaving behind a trail of indebted consumers and ailing building companies.

Continued covid lockdowns in crucial Chinese manufacturing hubs, and local transport issues have shown how fragile the global supply chain has become. The RBA, by raising mortgage rates, is aiming to slow spending and so bring inflation back to its target range of 2 to 3 per cent. They hope to bring it down smoothly for a soft landing. There is no doubt that business conditions are going to get tough over the next 12 or so months. Whether we get a technical recession (two negative quarters of growth) or not won't change that. Interest rates are rising, and house prices are coming off. Consumer confidence is falling. There is a lot riding on the RBA's ability to get it right.

Economists divide goods into two broad categories. Non-discretionary spending is things like food, electricity, rent and fuel etc. Categories where households have no choice but to spend. Much of the recent growth has come from discretionary spending, goods and service that are nice but not essential. These are the sectors that will feel the most pain as the economy slows. It is the first place households look for savings.

Dominic Regan R-Squared

0401 809 215 Dominic.regan@rsquaredeconomics.com.au www.rsquaredeconomics.org