Discretionary spending skyrockets now, but drop off will harm the economy

If you have extra money in your pocket, do you save it or do you spend it? Based off recent data from illion, the average Australian’s answer to that question is ‘spend it’, with spending across the board much higher than in the pre-COVID-19 world.

Stimulus packages and superannuation withdrawals have driven a sharp increase in spending. As is evident in the graph below, discretionary spending – that is, spending on ‘nonessential goods’ – is up, recovering from the March/April low. Essential spending is also up, however as the graph indicates it is not unusual to see a jump in essential spending during stimulus packages, and it will likely self-correct to a ‘normal’ amount of consumption in the future. The massive jump in discretionary spending is far more interesting as it means that most Australians, having received either a stimulus payment of some kind or having taken out the $10,000 Super withdrawal, are choosing to spend this money in the economy rather than save it. This is not a bad thing: after all, the goal of these stimulus measures was to ensure that life continued on as normally as possible, with normal amounts of spending. Considering that discretionary spending is currently 25% higher than usual, this is a promising outlook.

If we take a further look at just how people are spending their extra money, then there are few surprises. Food delivery is up 294%, while public transport is down 57%. This movement is in line with what the average Australian knows right now: stay inside, and try not to travel to work if possible. One major surprise is just how much is being spent on furniture and office goods. As you can see in the graph below, spending on these goods is up 114%. It is highly likely this increase is being driven by the sheer amount of ‘extra’ money people have at the moment, leading them to consider updating or replacing goods they usually wouldn’t. An added bonus of all this extra money is that consumer sediment hasn’t fallen as much as expected, because having this money for discretionary goods does make consumers feel more financially secure.

Consumer spending categories
Consumer spending categories

This increase in discretionary spending won’t last forever though. While it has been announced that the JobKeeper and JobSeeker payments will be continuing past the original September 27 end date, the payments will be reduced and eligibility will be reassessed. A single person can only make one withdrawal from his or her super before December 31 this year, so once this has happened there is no more ‘free’ cash through this avenue either. This will lead to many people having far less discretionary funds post-September, which will in turn lead to a drop in spending on ‘frivolous’ extras: food delivery service uses will be down, as will spending on furniture and office goods, department store spending, online gambling, etc.

The economy is likely to take a serious hit from this change in economic outlook. Currently, many people may be in financial distress (as seen in the image below), but the extra money in their pocket means that can they afford to put off dealing with this issue until sometime in the future. When September ends, this financial stress will be compounded by a lack of discretionary funds, which will make consumers far less likely to continue spending. Beyond a sharp drop-off in the amount of money moving through the economy – which will hurt businesses – consumer sediment will surely take a downturn, which will make people even more unlikely to spend money.

Consumer financial distress
Consumer financial distress is increasing across the country, with more parts of the map than not indicating increasing financial distress

Written: 22 July 2020, Updated: 28 July 2020

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