It continues to be slow going for Australia’s consumer recovery.
That's the conclusion of the latest Westpac review of the state of consumers in Australia. The upturn that began a year ago has lost its way in 2025 they find, with momentum still weak at best.
The consumer mood is still stuck at ‘cautiously pessimistic’ levels with clear headwinds coming from tariff related uncertainty abroad and a hesitant interest rate easing cycle. Indeed, there have been several instances now where promising signs of a lift early on in a survey week have been undone by adverse tariff or interest rate developments. Some of this was to be expected.
They thought the RBA easing was always likely to be a gradual one. Leading into 2025 Westpac economists had expected interest rates would be trimmed by -25 bps a quarter. But the actual track has been more ambiguous than the rapid-fire successive cuts we have often seen in the past.
That said, consumers do now seem to be clear on the direction of rates. "The vagaries of US tariff policy, potential retaliatory measures, financial market reactions and the ultimate impacts on trade and growth are harder to anticipate. For consumers, these issues just put a blanket of uncertainty on the economic outlook," they find.
Two things are keeping things tepid. Consumers are still rebuilding their financial buffers and are doing this for longer than expected. That is delaying any spending recovery, despite improvements in disposable incomes. Perhaps more surprising. it has also come despite a good rise in household net worth largely on the back of rising house prices. There seems to be a broad shift in how households see and prepare for risk; they seem more risk-adverse that pre-pandemic.
The second factor Westpac is identifying is a longer shadow from the ‘cost of living’ crisis. "Inflation has slowed but prices remain high. The slow rebound in sentiment towards major purchases suggests this is still exerting some restraint. Again, some drag was to be expected but it may be bigger issue than previously thought."
What is needed from here they say is a more decisive improvement in consumer sentiment. But the false starts 2025 has brought may not be over yet and it is still uncertain when some sustained traction in a consumer recovery will occur. Months? quarters? next year?
Household balance sheets: not too hot, not too cold
In a closer look at household balance sheets, they note the sheer scale of holdings – assets are well over 12 times annual disposable income meaning an 8% variation is equivalent to a full year’s income. Liabilities are much smaller but still large at around 1.5 times annual disposable income.
Debt has been steadily declining relative to income since 2018. A ‘net debt’ measure that excludes all cash and deposit holdings has essentially halved since it pre-GFC peak. The broad picture is of a gradual ‘passive’ deleveraging.
Over the last twenty years, growth in real household net worth per capita has averaged 2.7% pa, slightly stronger than the 1.2% pa growth in real household income per capita. The performance of asset value growth has risen materially over the past ten years with average growth of 3.3% pa for net worth vs just 0.3% pa for income.
A faster recent rise in house prices combined with a rebound in financial markets is going to give this difference a new spurt, although doubts remain whether this can be sustained without real per capita income rising faster. Housing accounts for more than half household net worth. And clearly that isn't evenly distributed through the age cohorts or the income cohorts. There are marked 'winners' and 'losers'.
Asset-price driven cycles and shocks clearly influence consumer sentiment and spending via ‘wealth effects’.
And that strongly influences the value of liquidity. Liquidity has been a particular concern through the ‘cost-of-living’ crisis with an effort to rebuild depleted reserves still shaping spending/saving decisions. In real, per capita terms, liquid asset holdings (deposits and shares) are now above previous peaks.