January 1, 2026 • 5 mins
Household spending is the engine room of the economy, and one of the clearest indicators of cost-of-living pressure. Sean Aylmer talks to Westpac Chief Economist Luci Ellis about how consumers ended 2025 and what lies ahead.
This episode is brought to you by Westpac. Fear & Greed's summer series - all-new short episodes every day, with regular news back from January 12.
Find out more: https://fearandgreed.com.au/
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:04):
Welcome to the Fear and Greed summer series, brought to
you by Westpac. I'm sure ailmark consumption, of which household
spending is a big part, makes the economy go around.
It also provides ample information about the state of the
consumer and the cost of living. To get some insights
into consumption for the year ahead, I welcome Westpac Chief
Economist Lucy Ellis. Lucy, welcome back to Fear and Greed.
Speaker 2 (00:24):
Thanks Sean. Always a pleasure and happy new year.
Speaker 1 (00:26):
Thank you very much. Consumers, how did they end last year?
How do you think we're heading into twenty twenty six?
Speaker 3 (00:32):
Sean, We saw a bit of a pickup in consumer
spending through twenty twenty five, decent growth in the third
quarter and ongoing growth according to our own data into
the December quarter. Sentiments been quite choppy and spending has
been quite choppy. People are still very value conscious and
they are still constrained by some of the increases in
(00:55):
the cost of living, some of the government driven price
increases water and electricity. They're the sort of things that
are crimping on people's budgets. But people do have a
bit more money to spend, and after a long period
where spending per person has gone backwards in inflation adjusted terms.
People are looking to be able to lift their spending,
(01:16):
but they are still a little bit constrained.
Speaker 1 (01:18):
So are we over the peak of the cost of
living crisis?
Speaker 2 (01:21):
We believe so.
Speaker 3 (01:22):
I mean, inflation is running a lot lower than it
was a couple of years ago. And indeed, even with
that little bump that we saw late last year, people
do have a bit more money to spend as well.
So it's not just the inflation piece, it's also how
much their incomes have grown.
Speaker 2 (01:39):
Over and above that. We have seen a recovery.
Speaker 3 (01:42):
In incomes adjusted for inflation, and so people have got
a little bit more elbow room to spend.
Speaker 1 (01:48):
Okay, So if we think of the economy as a
round circle, right, and think of a pie chart, I
suppose consumption is a really big part of that, isn't it. Yeah,
And then within that, household spending is a really big
part of it.
Speaker 2 (01:59):
Yeah.
Speaker 3 (02:00):
Well, that's because that's most of what households spend on.
We spend a bid on building new homes, so that's
dwelling investment, and businesses spend a bit on investment. But
households the population are what the economy is it's all
just people doing things, you know, day to day, and
that includes you know, spending on food, spending on rent,
(02:22):
spending on electricity, and driving their cars and going to
restaurants and buying Christmas presents, and that's all consumption.
Speaker 1 (02:30):
So if that's okay, it's reasonably stable consumption, isn't it
compared to other parts of the economy.
Speaker 3 (02:36):
Relative to investment. That's absolutely true. So businesses will tend
to invest more when they see the economy growing. They'll
pull right back when they see the economy weak. And
so the growth rates in investment tend to have bigger
swings than the.
Speaker 2 (02:51):
Growth rates in consumption.
Speaker 3 (02:53):
And you know, in economics we say that people like
to smooth their consumption. While you might have more you know,
Christmas spending or certain big expenditures, by and large, people
liked to have a sort of a fairly steady level
of consumption.
Speaker 2 (03:08):
You know, they have obligations.
Speaker 3 (03:10):
You've got to buy a certain amount of food, you've
got to buy a certain amount of clothes. You've got
a certain amount of streaming subscriptions that you've managed to be.
Speaker 2 (03:18):
Persuaded to pay for.
Speaker 1 (03:19):
That's right.
Speaker 2 (03:19):
They're the sort of things that tend to be fairly steady.
Speaker 1 (03:22):
Okay, and our pregum employment then plays a pretty big
role in that.
Speaker 2 (03:26):
Absolutely.
Speaker 3 (03:26):
Now in Australia, we've been lucky that we came out
of the pandemic with a quite high rate of employment.
The share of people with a job out of the
whole working age population, so that's everybody age fifteen and over,
including all the over sixty fives, that's actually been really
high lately. There are more older people working, There are
(03:47):
more women working than used to be the case ten
twenty thirty years ago. That has come off a little
bit lately, but it's still quite high. So lots of
people have jobs. But on the other hand, lots of
people needed jobs to make ends meet, and one of
the things we saw was that people were getting more
second jobs over the last couple of years in order
(04:08):
to make ends meet. That's starting to ease off.
Speaker 1 (04:10):
Now you've just taught me something which I just never realized,
and I've studied economics. The sixty seven percent participation rate
that includes all the Australians. That's so low. Yeah, right, okay, good, No,
that's good. So consumption for twenty twenty six, do you
think we if we're over the peak of the cost
of limiting crisis, and I know your base case is
for rates to be on hold for the next feol months,
(04:31):
or saying what happens to consumption.
Speaker 3 (04:34):
Well, if rates are pretty steady, we are seeing a
genuine cyclical upswing in consumer spending and in private sector demands,
so both households and businesses. That's already underway, so we
do expect that to pick up a little bit further
over time. If, however, the Reserve Bank does hike rates
(04:55):
a couple of times, that would be you know, we
would expect consumer sumption to be weaker, and we would
expect housing activity to be weaker.
Speaker 2 (05:03):
So based on what.
Speaker 3 (05:05):
We're expecting with a relatively steady interest rate outlook, we
would expect that to be a continued cyclical upswing to
something in the mid two percent range for growth rates.
Speaker 2 (05:19):
But that all depends on, you know, what else happens.
Speaker 1 (05:23):
Lucy, thank you for talking to Fear and Greed Summer series.
Speaker 2 (05:26):
Always a pleasure, Shawan, Thanks very much.
Speaker 1 (05:27):
That was Westpac Chief economist Lucy Ellis. Don't forget to
follow on the podcast. I'm Seanielmer and this is the
Fear and Greed summer series brought to you by West
Pact
Welcome to the Fear and Greed summer series, brought to
you by Westpac. I'm sure ailmark consumption, of which household
spending is a big part, makes the economy go around.
It also provides ample information about the state of the
consumer and the cost of living. To get some insights
into consumption for the year ahead, I welcome Westpac Chief
Economist Lucy Ellis. Lucy, welcome back to Fear and Greed.
Speaker 2 (00:24):
Thanks Sean. Always a pleasure and happy new year.
Speaker 1 (00:26):
Thank you very much. Consumers, how did they end last year?
How do you think we're heading into twenty twenty six?
Speaker 3 (00:32):
Sean, We saw a bit of a pickup in consumer
spending through twenty twenty five, decent growth in the third
quarter and ongoing growth according to our own data into
the December quarter. Sentiments been quite choppy and spending has
been quite choppy. People are still very value conscious and
they are still constrained by some of the increases in
(00:55):
the cost of living, some of the government driven price
increases water and electricity. They're the sort of things that
are crimping on people's budgets. But people do have a
bit more money to spend, and after a long period
where spending per person has gone backwards in inflation adjusted terms.
People are looking to be able to lift their spending,
(01:16):
but they are still a little bit constrained.
Speaker 1 (01:18):
So are we over the peak of the cost of
living crisis?
Speaker 2 (01:21):
We believe so.
Speaker 3 (01:22):
I mean, inflation is running a lot lower than it
was a couple of years ago. And indeed, even with
that little bump that we saw late last year, people
do have a bit more money to spend as well.
So it's not just the inflation piece, it's also how
much their incomes have grown.
Speaker 2 (01:39):
Over and above that. We have seen a recovery.
Speaker 3 (01:42):
In incomes adjusted for inflation, and so people have got
a little bit more elbow room to spend.
Speaker 1 (01:48):
Okay, So if we think of the economy as a
round circle, right, and think of a pie chart, I
suppose consumption is a really big part of that, isn't it. Yeah,
And then within that, household spending is a really big
part of it.
Speaker 2 (01:59):
Yeah.
Speaker 3 (02:00):
Well, that's because that's most of what households spend on.
We spend a bid on building new homes, so that's
dwelling investment, and businesses spend a bit on investment. But
households the population are what the economy is it's all
just people doing things, you know, day to day, and
that includes you know, spending on food, spending on rent,
(02:22):
spending on electricity, and driving their cars and going to
restaurants and buying Christmas presents, and that's all consumption.
Speaker 1 (02:30):
So if that's okay, it's reasonably stable consumption, isn't it
compared to other parts of the economy.
Speaker 3 (02:36):
Relative to investment. That's absolutely true. So businesses will tend
to invest more when they see the economy growing. They'll
pull right back when they see the economy weak. And
so the growth rates in investment tend to have bigger
swings than the.
Speaker 2 (02:51):
Growth rates in consumption.
Speaker 3 (02:53):
And you know, in economics we say that people like
to smooth their consumption. While you might have more you know,
Christmas spending or certain big expenditures, by and large, people
liked to have a sort of a fairly steady level
of consumption.
Speaker 2 (03:08):
You know, they have obligations.
Speaker 3 (03:10):
You've got to buy a certain amount of food, you've
got to buy a certain amount of clothes. You've got
a certain amount of streaming subscriptions that you've managed to be.
Speaker 2 (03:18):
Persuaded to pay for.
Speaker 1 (03:19):
That's right.
Speaker 2 (03:19):
They're the sort of things that tend to be fairly steady.
Speaker 1 (03:22):
Okay, and our pregum employment then plays a pretty big
role in that.
Speaker 2 (03:26):
Absolutely.
Speaker 3 (03:26):
Now in Australia, we've been lucky that we came out
of the pandemic with a quite high rate of employment.
The share of people with a job out of the
whole working age population, so that's everybody age fifteen and over,
including all the over sixty fives, that's actually been really
high lately. There are more older people working, There are
(03:47):
more women working than used to be the case ten
twenty thirty years ago. That has come off a little
bit lately, but it's still quite high. So lots of
people have jobs. But on the other hand, lots of
people needed jobs to make ends meet, and one of
the things we saw was that people were getting more
second jobs over the last couple of years in order
(04:08):
to make ends meet. That's starting to ease off.
Speaker 1 (04:10):
Now you've just taught me something which I just never realized,
and I've studied economics. The sixty seven percent participation rate
that includes all the Australians. That's so low. Yeah, right, okay, good, No,
that's good. So consumption for twenty twenty six, do you
think we if we're over the peak of the cost
of limiting crisis, and I know your base case is
for rates to be on hold for the next feol months,
(04:31):
or saying what happens to consumption.
Speaker 3 (04:34):
Well, if rates are pretty steady, we are seeing a
genuine cyclical upswing in consumer spending and in private sector demands,
so both households and businesses. That's already underway, so we
do expect that to pick up a little bit further
over time. If, however, the Reserve Bank does hike rates
(04:55):
a couple of times, that would be you know, we
would expect consumer sumption to be weaker, and we would
expect housing activity to be weaker.
Speaker 2 (05:03):
So based on what.
Speaker 3 (05:05):
We're expecting with a relatively steady interest rate outlook, we
would expect that to be a continued cyclical upswing to
something in the mid two percent range for growth rates.
Speaker 2 (05:19):
But that all depends on, you know, what else happens.
Speaker 1 (05:23):
Lucy, thank you for talking to Fear and Greed Summer series.
Speaker 2 (05:26):
Always a pleasure, Shawan, Thanks very much.
Speaker 1 (05:27):
That was Westpac Chief economist Lucy Ellis. Don't forget to
follow on the podcast. I'm Seanielmer and this is the
Fear and Greed summer series brought to you by West
Pact
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