Households’ finances moving from squeezed to crushed, economist warns

The cost of living is still rising. Photo / Sylvie Whinray, File

Households’ finances are being squeezed on several fronts with more pain to come, a leading bank says.

Westpac’s latest economic bulletin, titled From Squeeze to Crush, said high levels of inflation had eroded spending power.

At the same time, borrowing costs were continuing to rise and the value of household assets had fallen during the past year.

“For many families, the pressure on their finances is going to become much more intense over the year ahead,” Westpac senior economist Satish Ranchhod said.

“Close to half of all fixed-term mortgages will come up for repricing over the next 12 months, and those borrowers will face refixing at substantially higher interest rates.”

He said the increased interest costs would take a large bite out of disposable incomes.

“The Reserve Bank has been hiking interest rates at a rapid pace to cool demand and dampen the red-hot inflation pressures that are gripping the economy,” he said.

“However, as the full brunt of those interest rate increases ripples through the economy, we expect the nation will slip into a recession in late 2023/early 2024.”

Ranchhod said the rate of unemployment would rise to about 4.8 per cent in the coming years, from the current rate of 3.3 per cent.

The tighter financial conditions would be felt across the economy, but he said there would be some big differences across household groups.

“Those who purchased their first home in the past couple of years could see their finances being squeezed especially hard,” he said.

“Even for those people who still have jobs, they’ll still be facing a much bigger strain in terms of their spending. That could be a real drag on economic growth.”

Ranchhod said economic conditions would not improve as long as inflation continued at high levels.