Australia’s economy is built on the rhythm of spending and saving, but in 2025, a new buzzword is shaping headlines: underconsumption. As households tighten their belts and businesses adjust to changing demand, underconsumption is no longer just an academic concept—it’s reshaping everything from the Reserve Bank’s policy to the price of groceries at your local supermarket.
What is Underconsumption?
Underconsumption occurs when people and businesses spend less than the economy produces, leading to a shortfall in demand. In simple terms, there’s more supply than buyers. This trend can trigger slower growth, falling prices (deflation), and even job losses.
Historically, underconsumption theories gained traction during times of economic stress—think the Great Depression or Japan’s “Lost Decade.” In 2025, Australians are seeing echoes of these challenges as cost-of-living pressures and uncertainty drive a renewed focus on saving over spending.
Why Is Underconsumption a Hot Topic in 2025?
- Rising Living Costs: With grocery, energy, and rent prices still at record highs, households are prioritising essentials and cutting back on discretionary spending.
- Interest Rate Uncertainty: The Reserve Bank of Australia has held interest rates steady after a period of aggressive hikes, but consumer confidence remains fragile as borrowers adjust to higher repayments.
- Government Policy Shifts: The May 2025 Federal Budget introduced targeted cost-of-living relief and infrastructure spending, but economists warn that consumer caution is persisting despite these measures.
- Weak Wage Growth: While the minimum wage saw a modest increase this year, real wages for many workers are struggling to keep pace with inflation, limiting disposable income and further curbing demand.
These factors have combined to create a climate where many Australians are spending less, both by choice and necessity. Retailers have reported softer sales, and recent ABS data shows household savings ratios creeping up after a long decline since the pandemic.
What Are the Economic and Personal Impacts?
Underconsumption isn’t just an abstract concept—it has tangible impacts on everyday life and the broader economy. Here’s how:
- Business Slowdown: Retailers and service providers are facing reduced demand, leading some to scale back hiring or discount heavily to attract customers.
- Job Market Pressure: Sectors reliant on discretionary spending—like hospitality, travel, and entertainment—are seeing softer hiring trends in 2025.
- Potential for Deflation: If underconsumption persists, Australia could risk a deflationary spiral where falling prices discourage spending even further. Economists are watching closely, but so far, inflation remains subdued rather than negative.
- Shifts in Household Finance: Many families are embracing a more conservative approach to money, focusing on paying down debt, boosting emergency savings, and delaying big-ticket purchases.
Example: According to the latest Westpac Consumer Sentiment Index, nearly 60% of respondents in June 2025 reported postponing major household purchases due to economic uncertainty—a marked increase from the previous year.
How Are Policymakers and Households Responding?
The response to underconsumption in 2025 is two-pronged: government stimulus and household adaptation.
- Policy Response: The Federal Government’s 2025 budget includes targeted energy rebates, increased rental assistance, and infrastructure investment aimed at boosting employment. The Reserve Bank has signalled a willingness to cut rates if demand weakens further, but remains cautious about reigniting inflation.
- Household Strategies: Australians are getting creative to stretch their budgets—swapping brands, embracing second-hand markets, and leveraging cashback or loyalty programs. Many are revisiting their financial goals, with a renewed emphasis on building up savings buffers and minimising unnecessary expenses.
Financial advisors are encouraging households to regularly review their budgets and stay alert to policy changes that could impact their cost of living or access to support.
What Does the Future Hold?
Will underconsumption remain a defining feature of the Australian economy, or is it a passing phase? Much depends on global growth, wage trends, and the effectiveness of government measures. For now, the cautious mood is likely to persist as households and businesses weigh up their options in an uncertain world.
