In Brief: Omicron Impacts Economy, BNPL Slows

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Weekly Broker Wrap, In Brief: omicron economic impacts; consumption growth and consumer savings; buy now pay later slows. 

-Omicron spread exacerbates supply chain issues
-Savings rates crucial for global growth outlook
-Growth in buy now pay later slows among increasing competition
-Financial platform operators enjoying structural inflows

By Danielle Austin

Omicron-driven supply issues to impact on economy 

Supply chain disruption is escalating as omicron impacts loom and covid cases in Australia accelerate. Despite eased restrictions, mobility around the country has declined and contributed to supply shortages that Morgan Stanley expects will impact on the economy. 

The broker is forecasting gross domestic product in the first quarter of 1.1%, down from a previous forecast of 2.0%, followed by a notable rebound in the second quarter to 2.1%, reducing its 2022 gross domestic product growth forecast for Australia to 4.5% from 4.9%. 

Consumer spending and saving subject to large margins of error

Analysts have noted an unusually high level of risk to forecasts of consumer spending and saving behaviours given numerous unpredictabilities at play currently.

Given expected weak income and disposable income growth in the coming year, trends which are traditionally closely correlated to consumer spending, Oxford Economics’ forecast of continuing strong consumption growth would likely rely on a decline in consumer savings. Further, the rise of covid variants has seen restrictions reinforced in many regions, and analysts expect prolonged restrictions could cause a surge in savings rates. 

However, further reopening of global markets could see spending increase and discretionary spending may trend upwards in sectors like recreation and hospitality. Despite the possible error margin, Oxford Economics analysts expect a 4.5% rise in consumer spending in G7 countries following last year’s 5.8% increase, and a decline in US consumer saving to 6.8% in 2022 from 12.3% in 2021. 

Buy now pay later growth slows

Analysts at Citi are keeping track of website traffic in order to keep a finger on the pulse for companies in the buy now, pay later sector.

Results for December were a mixed bag as comparable site visits dragged in multiple regions. Afterpay ((APT)) recorded year-on-year website visit declines in the US and Australia & New Zealand regions of -2%  and -6% respectively, but a 2% increase in the UK off the back of year-on-year growth in all regions in November.

Similarly, Zip Co ((Z1P)) recorded year-on-year site visit declines of -75% and -11% in the US and Australia & New Zealand, as month-on-month visits declined in all regions including the UK.

Citi analysts noted comparable month-on-month metrics were cycling off a month that included key online retail days Black Friday and Cyber Monday, but also point out slowing growth for buy now pay later providers reflects an increasingly competitive environment plus an end in stimulus payments. 

Separately, analysts at Macquarie, who equally keep a close eye on website traffic for the sector, argue December numbers declined because of the combination of a hawkish Fed, regulation uncertainty and the spread of omicron dampening overall spending.

Macquarie's research suggests Klarna was bucking the industry trend in December. Could this be a sign that customers are jumping ship from other BNPL competitors?

Platforms enjoying structural benefits

Credit Suisse's analysis of financial platforms in Australia, with data unfortunately limited up to last year's September quarter, has further reinforced the observation this industry is enjoying structural funds inflows.

Continuation of the trend, which the analysts suggest is the likely scenario, implies benefits for all, including for those platform operators that are losing market share. As Credit Suisse explains, structural inflows generally sooth the pain for those platforms battling outflows.

Credit Suisse's optimism in particular concerns the investment side of the industry where Netwealth ((NWL)), Hub24 ((HUB)) and Macquarie Group ((MQG)) report the fastest growth. All three are expected to continue growing above trend.

Specialist platforms continue to grab market share with Netwealth and Hub24 combined grabbing no less than 84% of industry net inflows. On Credit Suisse's projections, both platform operators will increase market share currently at circa 5% to 9-10% over the next five years, and potentially to 14-15% by 2030.

Also, the last five years have seen the portion of advisers at independent advice firms rise to 85% from 60%. Credit Suisse's analysis shows this trend continued in the September 2021 quarter with another 2% shifting to independents.

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