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Savings jump, how will it be spent?

10 Nov 2021 6 month(s) ago

Savings in Australia soared during Covid because of government pump priming. That creates a bullish outlook for some sectors.

How are consumers spending their money as the economic impact of Covid eases? They certainly have a lot to spend, courtesy of government spending. Australia’s total bank deposits were $US2.54 trillion in June, about 24 per cent higher than the average level over the last 17 years.

It is because, in response to the crisis, the Federal government sharply increased government debt to pay for programs like JobKeeper (by issuing bonds) and the Reserve Bank undertook a program of Quantitative Easing, whereby it bought back government bonds. It was a sort of recycled money printing that pumped money into the economy.

Many of those who received the extra money during lockdowns shovelled much of it into their bank accounts rather than spending it. That extra money sloshing around in the system, especially the cheap money provided to the banks, turbo charged the domestic property market, causing prices to soar.

Savings jumped, in part because the closure of the international borders meant that about $5 billion stayed inside the Australian economy (the biggest reallocation was increased spending on renovations, great for the builders).

Retail trade, for example, has been volatile but strong:

So how is that money now being spent? Macquarie has sketched out the trends. One is that grocery spending has moderated as people start eating out again:

“During the latest lockdowns across the eastern seaboard, Grocery spending accounted for ~15% of total spending over Jul-Sep. As lockdowns started to ease from mid-Oct in NSW and then VIC, grocery spending has started to revert towards 11-12% of total spending, moving closer towards pre-COVID levels of ~10%. As people opt for dining out and other services including travel, we are starting to see the initial phase of COVID trends unwinding.”

Spending on travel is coming back as restrictions start to ease:

“As anticipated, October marked a strong rebound in travel spending. Travel, which historically accounted for ~10% of total spend, collapsed to almost nothing in the early months of the initial outbreak. In October, this has bounced back close to 6% of total spending. With grocery spending curtailing, we believe this has predominantly funded a recovery in travel. A slowdown in household goods spending may also drive a further recovery in coming months, notwithstanding the record household savings over the last 18mths.”

Macquarie says the trends are positive for services and a drag for staples:

“The current data is pointing towards a shift in consumer spending preferences. COVID losers like travel, personal services (ie hairdressers) and restaurants have posted a very strong month despite ongoing restrictions in Victoria. On-premise alcohol sales are seeing a slowdown in off-premise sales, but at this stage off premise sales remain well above pre-COVID levels.”

Macquarie gives some stock picks, saying the signs for consumer spending are very bullish going into the Christmas period:

“Our preference in Consumer Discretionary is for JB Hi-Fi (JBH AU, A$50.18, Outperform, TP: A$52.50) and Harvey Norman (HVN AU, A$5.05, Outperform, TP: A$6.40), while in Staples we prefer the lower PE (price earnings ratio) staple of Coles (COL AU, A$17.80, Outperform, TP: A$19.80) over Woolworths (WOW AU, A$39.63, Neutral, TP: A$41.50) and Endeavour (EDV AU, A$7.22, Neutral, TP: A$7.20). We caution on Wesfarmers (WES AU, A$60.33, Neutral, TP: A$61.35) that lead indicators in Hardware and General Merchandise are starting to slow proportionally relative to service consumption.”


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