Australia’s New Normal – Cautious Consumers
McKinsey View - Australians are worried by COVID-19 and their household “wallets”.
This will impact consumer behaviour and spending.
Given everything that 2020 has thrown at Australia so far, no one could blame its consumers for being a touch nervous. If you look below the surface however, they appear to be more than a touch worried.
Since the beginning of the COVID-19 crisis, Australian consumers have consistently been more concerned and cautious than consumers in countries that were far less effective at handling the health crisis. Our previous research showed the stark gap between the optimism of Australian consumers compared with those of the United States and China in particular—countries that are and were experiencing substantially worse health scenarios from COVID-19
In the months since the start of COVID-19, Australian fears about immediate health risks moderated, although the resurgence of the coronavirus in Victoria has caused a sharp increase in health worries again. Still, economic fears—individual and national—have stayed consistently higher than health worries. In this piece, we will explore that consistency of economic concern and how it will likely continue to show up in consumer behaviour in the coming months.
Consumer spending: A time of volatility
Australia saw a bit of cheer with the positive upticks in consumption and sentiment in May and June, perhaps because it was a much-needed sign of hope. A closer look suggests this rise was a sigh of relief that worse health outcomes had been avoided to date as well as a stimulus-boosted sugar-hit of pent-up demand in some spending segments. As this demand is released—and as Australians sink into the reality that battling COVID-19 is a marathon, not a sprint—the intent to make spending cutbacks and frugal, recession-like behaviour are showing up in our data across all segments and categories (with the exception of groceries, which have trended positively since more home-centric behaviour started).
First, it’s important not to be too distracted by the recent consumption upticks as we remember that our consumption and many of our businesses’ livelihoods are still on government life support. In fact, for some people, this life support has actually surpassed their pre-COVID-19 income. For example, Curtin University’s analysis reported that around four in five part-time workers in industries affected by COVID-19 are better off under the government’s JobKeeper Payment.1 Millions more Australians have also received one-off payments, targeted at lower-income households precisely because these households are more likely to spend the money and stimulate consumption.
While such support makes spending possible now, there is a looming understanding that it is not sustainable. As it steps down, the full economic impact of COVID-19 will be more evident (Exhibit 2). When considered along with other temporary support, such as loan relief from banks, dips into superannuation funds, and childcare relief, the masking of true consumption patterns is significant. Recent announcements to extend more targeted, lower-value JobKeeper payments until March 2021 will smooth the withdrawal of stimulus, but it won’t cushion the full impact of COVID-19 on household incomes.
Using consumer insights to increase preparedness
Because of these artificial cushions to the economic blow of COVID-19, it could be that we are, as a nation, like a patient still in shock from an injury. We are only just now gradually feeling the adrenaline wearing away, with the dull reality of recovery and a long road ahead settling in. The upside is we have good data all around us that can help us build the right preparedness—if we move quickly and study and mine it properly.
We know from history that Australian consumer sentiment does, in fact, tend to harden. When consumer sentiment declined in the early 1990s, it remained negative for many years, lagging well behind macro indicators as the economy technically recovered. We also know that the cautious mindset of Australians shows up in spending pullbacks that, in aggregate, are disproportionate to the actual drop in household income. We have seen this trend since the start of COVID-19 in our data—with every pulse check, more Australians are reporting reductions in spending than those whose household income has declined.
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