Household budgets leave no room for fun

Australians are spending less on recreation as ever-larger portions of their budgets go to pay for basic necessities

Household budgets leave no room for fun

A growing number of consumers in Australia are experiencing increased financial pressure as a larger portion of their household budgets is allocated to essential expenses such as utilities, rent, and insurance.

 This shift in spending priorities is forcing many households to significantly reduce their expenditures on discretionary items like entertainment, recreation, and dining out, The Australian reported.

According to a recent survey conducted by investment bank UBS, millions of households are feeling the strain caused by successive interest rate hikes over the past year and depleted cash reserves. While higher-income earners may still have some financial flexibility, lower-income households are resorting to borrowing from friends and family or selling possessions to meet their daily expenses.

The UBS Evidence Lab survey paints a bleak picture of Australian consumers and the retail sector, which plays a crucial role in the national economy, The Australian reported. Retailers are reporting dwindling sales and decreased profits due to the reduction in discretionary spending by financially constrained households.

Fun is off the table

Richard Schellbach, a UBS strategist, said that the burden of rising living costs, coupled with interest rate increases, is taking a toll on middle-income households.

“Middle-income households are now showing clear signs that the transmission of pain from the rate hiking cycle, which began over a year ago, is now hitting hard,” Schellbach told The Australian. “WIth cost-of-living categories unable to be scaled back – in nominal terms, due to sticky inflation – consumers in ‘mortgage belt’ Australia are telling us that they expect to sharply reduce their spending on ‘fun’ categories, such as entertainment, recreation, eating out, takeaway food, and international travel.”

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Schellbach said that Australian consumers have demonstrated remarkable resilience in the past year, largely thanks to savings accumulated during the COVID-19 pandemic. However, the latest consumer data for the second quarter reveals that many low-income consumers have exhausted their savings and now rely on borrowing or selling assets to sustain their daily expenses.

Mortgage cliff

The looming challenge for households is the mortgage cliff. Household savings ratios have declined, reaching their lowest level since the global financial crisis, with a first-quarter 2023 ratio of just 3.5%. Despite this, household deposit growth remains robust at 8% year-on-year in April 2023, indicating that some households still possess significant cash reserves to support future spending, driven by strong income growth, The Australian reported.

Surveyed consumers anticipate further interest rate hikes by the Reserve Bank of Australia, which will exacerbate the financial strain and lead to a decline in discretionary retail sales. Their outlook aligns with the hawkish view of the Australian consumer, who expects mortgage rates to rise by another 100 to 300 basis points in the next year. This awareness among consumers suggests a further deceleration in spending, The Australian reported.

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