Australian households are facing major threats from higher energy and mortgage costs

Photo: Mark Nolan/Getty

Despite a run of good data points, Morgan Stanley remains cautious on the outlook for the Australian economy.

The bank’s equity strategists noted the recent strength in both employment growth and retail sales.

That was followed up yesterday by a robust result in the NAB business confidence survey, which suggests that business conditions in Australia are strengthening.

Despite some positive leading indicators, this chart from Morgan Stanley demonstrates how Aussie consumers are still feeling the strain:

Source: Morgan Stanley

It shows how money left over for discretionary spending after bills and mortgages have been repaid has clearly diverted lower from its long-term average.

Looking ahead, the Morgan Stanley team further analysed two familiar trends which could still weigh on consumer sentiment – higher energy costs and increased mortgage repayments.

First, they noted that the latest round of electricity price hikes will increase prices in NSW by 16-20%.

With the price increases taking effect from July 1, Morgan Stanley said that consumers haven’t yet felt the impact from the next bill cycle.

They also considered the extent to which macro-prudential measures introduced in March were still flowing through to consumers.

In addition to banks bumping up the rates on interest-only loans, the new regulations limit the number of interest-only loans that banks can issue to 30% of all new loans.

Yesterday’s housing finance data showed that APRA’s restrictions are having a clear effect, with growth in investor lending now at the slowest level since August last year.

Looking at the portfolios of the major banks, the analysts said that the new restrictions would force interest-only borrowers to shift more cumbersome principal & interest repayment arrangements.

“Assuming 5-year interest-only periods for owner-occupier, and 5-10 years for investors, this would see $20-$30 billion in interest-only mortgages coming up for refinance over the next 12 months,” Morgan Stanley said.

If a quarter of those loans are re-financed into both principal and interest to meet the 30% limit, then combined with interest-only rate increases Morgan Stanley estimates an aggregated hit to consumers hip pockets of around $2.5 billion.

The continued headwinds may go some way to explaining Aussie consumers’ more negative view of the broader Australian economy, which David Scutt pointed out yesterday.

It suggests that while the Australian economy looks to be on a sound footing, threats to domestic consumption remain as consumers navigate the difficult combination of high living costs and low wage growth.

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