Australia’s Ticking Spending Boom

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-Early lockdowns were followed by a consumer spending splurge in 2020
-Lockdowns in 2021 are equally translating into above average savings
-Will history repeat once the current lockdowns in NSW and Victoria are lifted?

By Nikhil Gangaram

With the majority of Australia’s population experiencing some form of COVID-19 induced lockdown in the last three months, Australian stocks could be poised to benefit once the nation emerges from the pandemic.

In June of 2020, Australia recorded its worst quarter of economic growth as many businesses prepared for the first recession in 30 years. 

However, an economic disaster quickly turned into a Christmas miracle. Powered by record low interest rates, government support and a war chest of savings, consumers helped lift end-of-year retail sales by 11% by splurging over $55bn throughout the Christmas trade period. 

The question today is whether this year will play out the same or will the delta variant quash a consumer spending recovery?

Locked-down and loaded

With the pandemic limiting how households spend their income, it has allowed many consumers to add to their savings. As a result, Australia’s household savings ratio is nudging its highest levels since 1986.

According to the Australian Bureau of Statistics (ABS), the household savings ratio hit a record of 22.1% in the June quarter of 2020. For the March quarter of 2021, the household savings ratio dipped from its peak in 2020 to sit at 11.6%. Despite the drop, savings were still far above their pre-pandemic rate of 5.3%.

In addition to savings behaviour, government and industry assistance has also helped prop up Australia’s savings boom. The Federal government has pledged $250bn in stimulus in the form of JobKeeper, small business cash flow payments and early release superannuation payments.

Lower interest rates and booming house prices have also reduced debt-servicing costs for households, encouraging consumers to take on more debt. This has left households feeling wealthier and more open to consume larger portions of their income.

According to data from the Australian Prudential Regulation Authority (APRA), household banking deposits surged by $113bn or 11.4% from the start of January to the end of November of 2020.

As a result, data suggest that households have stashed away more than $190bn since the start of the pandemic.

To put this in perspective, this amount equates to around 12% of annual household income, which bodes well for Australia’s post-pandemic economic recovery.

A Christmas miracle

The initial novelty of the first lockdowns in 2020 resulted in the rules of retail being rewritten. 

As retailers temporarily closed their doors, they simultaneously opened the gates of e-commerce.

Consumers rushed to buy equipment that would allow them to earn and learn from home. As a result, investors in equity markets focused on online retail and buy-now-pay-later providers who facilitated transactions emerged as pandemic winners.

From 1 January to 31 December 2020, shares in e-commerce retailer Redbubble ((RBL)) returned 388% compared to a return of 1.4% for the ASX200. Shares in online furniture retailer Temple & Webster ((TPW)) returned 306% for the period, followed by e-commerce specialist Kogan.com ((KGN)) which returned 155%.

Traditional retail stocks such as Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) also benefited with their sales for the second half surging 27% and 23% respectively. 

Once vaccination rates are achieved and lockdowns lifted, we could well see consumers fling themselves to shops once more. 

In addition to retailers, stocks exposed to the services sector could be poised to benefit from cashed up shoppers. 

Services a sleeping giant

Lockdowns and border closures have resulted in consumers restricting their outlay on services. With the inability to travel or splash on dining experiences, service-related spending shifted to the consumption of physical goods.

A recent consumer survey from the UBS Evidence Lab suggested that companies operating in the services sector are poised to be on the receiving end of a new spending boom.

The survey highlighted a fall in the online spending intentions of consumers, which could bode well for stocks weighted to the services sector.

In the not so distant future, when the dystopia of border closures are obliterated, companies in the Australian travel sector would be the first to benefit. The likes of Flight Centre ((FLT)), Webjet ((WEB)) and Qantas Airways ((QAN)) are the first that come to mind. 

If not by air, many Australians will be looking to get out on the open road. As a result, we could expect a surge in demand for vehicle services provided by ARB Corp ((ARB)), Bapcor ((BAP)) and GUD Holdings ((GUD)).

The lifting of stay-at-home orders will also be welcomed by malls and in-centre entertainment and dining facilities like Scentre Group ((SCG)) and Vicinity Centres ((VCX)).

On a similar note, many punters will be itching to get back to the baccarat tables provided by Crown Resorts ((CWN)) and Star Entertainment ((SGR)).

Mums and dads bereft of home-schooling will also be vying for childcare centres operated by the likes of G8 Education Limited ((GEM)).

As a result, stocks directly exposed to the services sector could be a sleeping giant as consumers emerge from lockdowns. 

Ticking spending boom

It is important to note that all factors that supported Australia’s recovery last year are, in some form, back in 2021. 

Interest rates remain at record lows, government spending is still flowing through the economy and locked-down consumers are growing their savings war chest to record levels. 

There is a chance that the longer Australians have to endure lockdowns the more it raises uncertainty around consumer confidence. If confidence is reduced and reopening is staggered, spending may bounce back slower this time around. 

Regardless, there is plenty for investors to be optimistic about as the pressure cooker of pent-up consumer demand ticks away.

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