It looks like Australia's property downturn is starting to have an impact on household spending

Mark Wilson/Getty ImagesSpending patterns mirror what’s been happening in the housing market
  • Spending across the Australian economy slowed sharply last month, growing at the slowest pace in over a year.
  • Spending fell by 0.1% in NSW, and grew by just 0.2% in Victoria. Spending levels were far stronger in other states and territories.
  • Those patterns also mirror recent developments in home prices across the country.

Spending across the Australian economy slowed sharply last month, growing at the slowest pace in over a year.

According to the Commonwealth Bank’s Business Sales Indicator (BSI), a gauge that measures electronic spending through the bank’s terminals, economy-wide spending grew by just 0.3% last month in trend terms, continuing to decelerate from the levels seen late last year.

“While we have continued to see an overall lift in spending for fifteen consecutive months, in May growth slowed to the weakest trend pace for over a year,” said Craig James, Chief Economist at Commsec.

“The last time the BSI was this low was April 2017, with the BSI showing spending growth between 0.8 to 0.9% from November 2017 to March 2018.”

The slowdown in spending can be seen clearly in the chart below from the Commonwealth Bank, and fits with the steep deceleration seen in household consumption expenditure in Australia’s March quarter GDP report released earlier this month.

Commonwealth Bank

The BSI tracks the value of credit and debit card transactions processed through the Commonwealth Bank merchant facilities over a specific month, and includes spending on retail goods as well as services. It does not include cash transactions.

As such, the bank says it’s comparable to nominal household consumption expenditure in Australian GDP. Household consumption is the largest part of the Australian economy at around 60%.

While the BSI only tracks spending processed through Commonwealth Bank terminals, as Australia’s largest retail bank, it is likely reflective of broader spending patterns across the economy.

The news in May was not all that good, especially in New South Wales, the state that has seen the largest property price declines this year due to persistent weakness in the Sydney market.

Spending levels in Australia’s most populous state went backwards, falling 0.1% from a month earlier. Victoria, where home prices are also falling, also recorded a modest increase of just 0.2%.

In contrast, sales in Queensland, Tasmania and South Australia — three locations where home prices have risen this year — spending growth was strong, lifting by 0.9%, 0.7% and 0.7% respectively from a month earlier.

By category, James said the deceleration in sales growth was driven by reduced spending on items such as transportation and amusement and entertainment which both fell 0.5% over the month.

Spending at retail stores and on government services was also weak, falling 0.3% and 0.2% respectively.

“It will be interesting to watch whether the downtrend in discretionary spending continues, potentially a casualty of higher petrol prices,” James said.

Crude oil prices hit multi-year highs in May, driven by supply disruptions and geopolitical tensions between the United States and Iran. That flowed through to petrol prices in Australia which also hit the highest level seen in several years.

While higher fuel costs may have contributed to the drop in spending in discretionary areas, the state-split in the BSI also fits with recent movements in home prices across Australia.

At its June monetary policy meeting, the Reserve Bank of Australia (RBA) said the “outlook for consumption growth continued to be a source of uncertainty, given that household income growth had been slow and debt levels remained high”.

Given the slowdown in the BSI and official measures coincides with property price declines in Sydney and Melbourne, reducing the wealth effect for households in those cities, this potentially provides another layer of uncertainty on the outlook for household spending, especially at a time when employment growth is also slowing.

In June, the RBA simply noted that “conditions in the established housing market appeared to have eased further in Sydney and Melbourne”.

“Housing prices had fallen a little in both cities, particularly for more expensive dwellings,” it said.

“Members noted that, nonetheless, housing prices were still 40% higher in Sydney and Melbourne than at the beginning of 2014.”

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