Australian households are expected to embrace a “freedom Christmas” without COVID restrictions or bushfire smoke before enduring a financial hangover in 2023 as inflation and soaring interest rates almost bring the economy to a standstill.

Ahead of the Reserve Bank’s final meeting of the year at which it is expected to take official interest rates to a 10-year high of 3.1 per cent, policymakers believe Australians will go on a spending binge at the first Christmas since 2018 unaffected by events that have curbed expenditure for the past three holiday seasons.

Shoppers at the weekend doing some retail therapy ahead of Christmas.Credit:Joe Armao

But the joy of Christmas is expected to fade quickly, especially for the hundreds of thousands of home buyers with fixed-rate mortgages who face a sharp increase in their repayments as their loans start to rollover from February.

The past three Christmases have been the worst on record for retailers, with sales falling in the Decembers of 2019, 2020 and 2021. The 2019 period, during which retail turnover fell by 0.4 per cent, was heavily affected by the unprecedented series of bushfires across the country that year.

Sales also fell by 3.3 per cent in December 2020 and by 4.1 per cent last December as pandemic restrictions curbed the spending opportunities of Australians.

Barrenjoey chief economist Jo Masters said the savings buffer built up by Australians through the past two years was likely to be spent this Christmas, but next year will be much tougher.

Barrenjoey chief economist Jo Masters believes the freedom of this year’s Christmas will give way to tougher times in 2023.Credit:Jessica Hromas

“After several years of disrupted summers, I am definitely hearing Australians are keen to spend time with family and friends, travel and generally celebrate,” she said.

“The outlook for 2023 is much more sombre for households – we expect real wages to contract through the year, mortgage repayments and rents will take up a much larger portion of household budgets, as will electricity and gas, although we may see some government relief on the latter.

“In addition, we expect falling house prices to weigh on consumer spending.”

One senior economist said there were signs of a “freedom Christmas” this year and early reports from retailers suggest savvy shoppers flocked to the Black Friday and Cyber Monday sales with that spending spilling over into the early parts of December.

Australia’s retail sector has cheered the return to in-store shopping over the sales period, with some of the nation’s biggest operators reporting strong spending as consumers approach a restriction-free Christmas.

Retail billionaire Solomon Lew told shareholders at his Premier Investments annual general meeting on Friday that momentum had been building both in-store and online with strong foot traffic expected through the festive season.

“We’ve got it all ahead of us now – Christmas sales, Boxing Day, back to school – we’ve got a lot of trading to do,” Lew said.

The spending of this Christmas, however, is expected to run into the reality of much higher mortgage rates, falling real wages and a global economic slowdown caused by central banks using interest rates to bring inflation under control.

The Reserve Bank expects the share of household income spent on interest payments to reach record or near-record highs after falling to all-time lows when it had the cash rate at 0.1 per cent.

The September quarter national accounts, to be released on Wednesday, are tipped to show annual economic growth spiking towards 6 per cent. But this is predicted to slow sharply over the next year, the Reserve Bank forecasting growth to reach 1.4 per cent by the end of 2023.

Globally, the IMF and OECD are expecting many developed nations to fall into recession next year.

Deloitte Access Economics is among those expecting consumer spending to slow sharply in the coming year.

“For now, we’re expecting the holiday season and end-of-year events to throw the retail sector a lifeline,” Deloitte Access partner David Rumbens said.

“Looking ahead, retailers are likely to face a difficult six months as they ring in the new year. With cost-of-living pressures and a mortgage rate squeeze clouding the horizon, retailers are growing pessimistic about the state of the consumer in 2023,” he said.

EY chief economist Cherelle Murphy is sceptical of the freedom Christmas, saying consumers were already facing strong headwinds.

“The conditions for slower consumer spending are in place, especially given real wages continue to fall, interest rates are still rising, house prices are moving south in nearly all capital cities and substantially higher electricity and gas prices are expected to eat into discretionary income,” she said.

“The recent devastating floods are another challenge, likely to both add to inflation and slow growth in the short-term, given already frustrated supply chains.”

The Commonwealth Bank’s head of Australian economics, Gareth Aird, said there was a large number of people with fixed-rate home loans who would experience substantial increases in repayments through 2023.

“The RBA is still flying blind to a degree given the last few rate hikes have not yet hit home borrowers from a cash flow perspective,” he said.

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