Developed market consumers have proven resilient despite significant monetary policy tightening. We decompose consumption into income and savings to understand the vulnerability of consumers to changes in interest rates and the macro environment.  

Income dynamics, despite becoming more favourable as headline inflation falls, should be negatively impacted by rising debt servicing costs and slowing wage growth. 

For consumers in economies with mortgages that are fixed for longer periods, like the US, the pass-through of higher rates remains tempered. But Australia, Canada, the UK, and Sweden will see more households refinancing at higher rates, weighing on disposable incomes. 

On the savings side, consumers have drawn down pandemic-era savings to differing degrees to support consumption. In Australia, the US and Sweden we estimate that excess savings are nearly depleted, but the Eurozone, UK and Canada retain big overhangs.

Savings decisions going forward will impact the share of income left for households to spend. Higher returns on savings and expectations of a slowing economy could cause households to increase saving rates. 

Sweden is looking vulnerable already, but high levels of debt in Australia and Canada, and mortgage headwinds for already constrained UK consumers should see pullbacks in spending in these regions too. Although sheltered to some degree from mortgage market dynamics, the resumption of student loan repayments as well as a slowing labour market should temper US consumption. 

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