Consumer confidence nudges upwards but remains deeply pessimistic

Consumer sentiment increased by 3.0% to 80.3 in December 2022. Despite this month’s increase, the Index remains in deeply pessimistic territory and at a low comparable with levels recorded during the COVID-19 pandemic and the Global Financial Crisis. As pent-up lockdown demand fades and household savings levels unwind, Westpac forecasts household consumption will slow from around 2% in the first half of 2023 to near zero in the second half. The first signs of consumers pulling back on spending can be seen in the most recent ABS retail sales data for October 2022, which recorded the first decline in sales this year of 0.2% (seasonally adjusted). Online retail sales recorded a second month of growth in October 2022 (2.2%, seasonally adjusted), yet remain down in year-on-year terms (-11.8%, seasonally adjusted). There will be strong competition to capture consumers’ spend in 2023, not only between retailers, but also between other sectors such as travel. Coupled with the general cost of living pressures, retailers may face strong headwinds in 2023. Retailers should carefully consider their pricing structure and strategy to capture increasingly cost-conscious consumers and unwind high inventory levels, as well as consider their brand and relationship with customers.

Consumer confidence

• 1 month - 3.0%

• 12 months - (23.0%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment increased by 3.0% in December 2022 to 80.3, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was conducted in the week the RBA raised the cash rate for the eighth consecutive month to a 10-year high of 3.1%, yet consumer sentiment did not have a strong negative reaction to the announcement of a rate rise as it has done in previous months. Instead, it seems consumer pessimism surrounding rate rises has levelled off, with the notion that the bulk of the interest rate tightening cycle is behind us. The component indices that experienced the strongest uptick were the ‘family finances, next 12 months’ and the ‘economy, next 5 years’ (6.9% and 5.2%, respectively), indicating consumers’ outlook on finances and the economy in the medium-term improved. Despite the lift in confidence in December, consumer sentiment remains in deeply pessimistic territory. The survey revealed that inflation and the state of the economy remain consumers’ key concerns, with 58% of respondents recalling news on the topic of inflation. Headline CPI inflation was 7.3% over the year to the September quarter, the highest rate in over three decades, and is expected to reach around 8% by the end of 2022. CPI inflation is largely attributable to housing (+10.5%), food and non-alcoholic beverages (+8.9%) and transport (+7.4%). It is evident that consumers, particularly low-income earners and the elderly, are feeling the impact of rising cost of living pressures.

Retail sales

• 1 month - (0.2%)

• 12 months - 12.5%

Source: Australian Bureau of Statistics

Following nine consecutive months of increases, the most recent ABS retail sales data for October 2022 recorded a 0.2% decline in sales to $35 billion (seasonally adjusted). October 2022 sales were, however, $3.89 billion higher than October 2021 sales (+12.5% vs October 2021, +18.2% vs October 2020). The October fall in retail sales is the first decline since the onset of the pandemic that did not correlate to COVID-19 restrictions or lockdowns, and suggests that increased cost of living pressures, including interest rate rises, have started to weigh on consumer spending. Sales declined in all categories, except food retailing (+0.4%), which remained elevated due to flood-related spending and increased food prices. The most significant decline was recorded in the department stores category (-2.4%), followed by clothing, footwear and personal accessory retailing (-0.6%) and household goods retailing (-0.5%). As elevated savings and post-lockdown demand eases, some categories such as “cafés, restaurants, and takeaway food services” (-0.4%) are starting to see the return of normalised trading conditions. Some of the decline may have been attributable to consumers “saving up” for the November sales events. The November 2022 ABS retail sales data will provide further insight into consumer spending habits, with initial data suggesting strong spend during the Black Friday and Cyber Monday sales events.

Online retail sales

• 1 month - 2.2%

• 12 months - (11.8%)

Source: NAB Online Retail Sales Index

On the back of September’s modest gain, the NAB Online Retail Sales Index showed a second consecutive month of growth in October 2022 (2.2%, seasonally adjusted). In year-on-year terms, online retail sales remain significantly down (-11.8%, seasonally adjusted) compared to the period of exceptionally strong growth in October 2021, which was driven by lockdowns in NSW, the ACT and Victoria. All categories, except takeaway food, recorded growth in October, with media and personal and recreational goods being the two standout categories. Despite being a relatively small category, media has contributed to over a third of all online sales growth over the last 12 months. Online retail sales in the 12 months to October totalled $53.43 billion and are estimated to represent approximately 13.3% of total retail sales (+2.3% compared to the 12 months to October 2021). Growth in online retail sales is expected to continue in November 2022, with NAB data showing the week-on-week growth of online spend (+24%) nearly doubling the growth of spend at physical terminals (+11%) during the Black Friday and Cyber Monday sales events, indicating consumers favoured online shopping.