The old relationship between consumer spending growth and economic drivers has broken down

Between the recession of the early 1990’s and the global financial crisis (GFC) in 2008-09 there was a reasonably consistent relationship between Australia’s consumer spending growth and drivers such as interest rates, employment growth, and residential property prices.

Since then, the old relationships have broken down.  In addition, there has been the Covid-19 pandemic disruption which has outweighed the impact of economic drivers.  Since mid-2021 consumer price inflation has spiked to the highest level since 1995 (except for the temporary blip when goods and services tax was introduced, for which consumers received some compensation).

In recent times, therefore, economic models have not predicted accurately and other techniques have become more important.  These are based on adaptive trend models, near real-time indicators, and judgement.

It may be that, in time, reliable relationship with economic drivers will be re-established – but the old relationships will not be reliable.  This is because of seemingly permanent changes.

For example, the relationship between interest rates and consumer spending has changed significantly in recent years (see chart below).  Now more adults prefer higher interest rates than prefer lower interest rates, a major change since just before the GFC.

This change has been brought about by the ageing of the population (older people tend to have more savings than younger people and less debt), increased saving since 2010, and very low interest rates historically which has reduced the interest payment to household disposable income ratio to a record low in 2021 and early 2022.  Despite the decline in interest rates between 2011 and 2019, to a record low, consumer spending growth declined – further proof of the changed relationship between interest rates and spending.

This change affects most consumer marketers as well as economic forecasters.  It also means different strategy is needed for optimal decisions by consumer marketers.  Our analysis, based on proprietary indicators, can assist with the strategy change.

Charlie Nelson