Consumer spending down due to Omicron, but things are looking positive

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Consumer spending down due to Omicron, but things are looking positive

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 Consumer spending down due to Omicron, but things are looking positive
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Highlights

  • Omicron has caused significant decline in household spending.
  • Inflation and higher labour costs have impacted business conditions in Australia.
  • Economists believe the impact of Omicron is lesser in comparison to previous COVID-19 variants.

As per the Commonwealth Bank of Australia (ASX:CBA), household spending in Australia has seen a huge dip due to Omicron variant of COVID-19. Even business confidence in Australia has declined according to the NAB’s (ASX:NAB) January 2022 business survey. However, leading economists believe that the impact of Omicron on Australian businesses and consumers are not as far reaching as previous Covid-19 variants.

Decline in consumer spending

In January, the CBA’s popular CommBank HSI index has shown a 10% fall in retail, entertainment and household services spending. The index is based on the largest consumer spending data set in Australia and a broad-based decline in consumer spending was visible on it.

The CBA economists also estimated a drop in seasonal spending intentions in January. The spending intentions estimate fell more than normal in January due to rising cases of Omicron. Entertainment spending dropped 20.8% in January as spending on theatre, record stores, etc. remained low. Spending on household services also weakened by 14.4% in January.

Nevertheless, on a positive note, CBA’s weekly credit and debit card data till 4 February 2022 reflects a spending growth pick up. While consumer spending fell in early January, there was some improvement towards month-end.

While Consumer spending also went down, even business conditions were not favourable in January. As per an NAB report, business conditions fell below their long-run average as all of the three components determining business confidence declined in January 2022.

Profitability was down 8 points to +2 index points (ip), trading conditions dipped 7points to +7 ip and even employment edged down 3points to -1 ip. Rising Omicron cases resulted in staff shortages and dwindling consumer confidence which badly affected the recreation and personal services sectors. However, conditions were still in the positive zone as business confidence rebounded from December’s -12 ip level to +3 ip in January, up 15 points in a month.

Impact of Rising costs and inflation on business confidence

According to the NAB’s survey report, another factor impacting business confidence was inflation. Inflationary pressures continued causing elevated purchase and labour costs for businesses, as a result, the final product prices remained higher. Though retail price inflation was somewhat lower, down from 2% to 1.3% in quarterly terms.

Also read- Thanks to lockdown recovery, Australia records robust retail sales in Dec 2021 quarter

RBA’s stance on Business investment and employment

The RBA’s economic outlook statement of February 2022, had also forecasted an increase in underlying inflation, up 3¼ % in mid-2022. The RBA’s estimate was primarily reflective of an upstream cost pressure in the housing construction and durables goods sector.

However, the slowdown was expected to be temporary as RBA could perceive a broader recovery in domestic demand. RBA believed that the rise in consumption would be backed by strong labour income growth and significant rise in household wealth.

Further RBA also pointed out that Omicron would not have a lasting impact on labour demand as employment would grow strong in 2022. In fact the apex bank even anticipated a higher level of participation in the labour force in March quarter.

Bottom line-

As the Australian economy moves towards normalisation and border reopening, effect of Omicron may smother down. However, for Australian businesses Omicron and other Covid-19 variants will remain an influencing factor. The recovery of trading activity, profits and employment will be known only in the coming weeks.

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