Consumer spending accelerated in May but downside risks persist

Consumer spending rose 1.2 per cent in May following subdued growth of 0.2 per cent in April, tentatively suggesting that spending may have begun to pick up following a sluggish start to the year, NAB’s May economic insight showed.

“Both official (ABS) and NAB data have reflected a weaker-than-expected consumer spending in the first four months of the year,” NAB said.

“In this context, our data for May are a welcome improvement and tentatively suggest that spending may have picked up as we move through the second quarter. However, a more sustained and broad-based recovery will depend on the evolution of consumer and business confidence throughout the rest of the year.”

ABS figures showed that household consumption was muted in the first quarter of 2025, rising by 0.4 per cent, while discretionary spending was slow (0.3 per cent) after stronger-than-usual retail sales in the December quarter.

Commonwealth Bank (CommBank)’s May household spending insights recorded a 0.5 per cent lift in May, after a flat (0.2 per cent) April reading.

CommBank economists expected to see a pickup in household spending across the second quarter of 2025 as RBA rate cuts flowed into households’ hip pockets and consumers had more domestic certainty following the decisive May election result.

However, household spending could take longer than expected to bounce back amid cost of living pressures within the high-inflation post-pandemic economy, the economists predicted.

“Overall, we are suspecting that scarring from a loss of real household disposable income post COVID due to high inflation, restrictive interest rates and higher tax payments are seeing household spending take longer to bounce back,” they wrote.

While disposable income has begun to climb upwards, it has remained substantially below the trend it was on prior to the Covid pandemic, CommBank’s real household disposable index showed.

To date, June quarter household spending data had not shown strong signs that consumers had significantly lifted their spending momentum, CommBank said.

The Reserve Bank has been keeping a close eye on consumer spending, which it predicted would recover throughout 2025.

In its May monetary policy meeting, the RBA considered dropping rates by 50 basis points due to the dual risks of global trade uncertainty and the potential for a weaker-than-forecast pickup in household consumption.

The board noted that underlying momentum in consumer spending had been weaker than expected in early 2025, observing that earlier declines in real household disposable income remained a constraint on consumption.

While the board settled for a 25 basis point rate cut in May, the RBA is likely to closely monitor the consumer recovery to inform its next cash rate decision in July.