Amidst ongoing cash rate rises and persistent inflationary pressures impacting the cost of living, consumer sentiment increased 3.9% in September 2022 to 84.4. This improvement represents the first increase in consumer sentiment since November 2021 (when the index was at 105.3). Although the RBA has indicated more interest rate increases will come and inflation remains a concern, this month’s increase in consumer sentiment is likely attributable to strong labour market confidence stemming from the low unemployment rates (3.4% in July 2022 and 3.5% in August 2022), lower petrol prices and an apparent shift in consumer mentality (for the time being) where they are perhaps “steeled” against interest rate increases. The full impact of the rate rises is yet to be experienced as a result of fixed rates and other factors, suggesting these pressures may impact consumer spending in the months to come. Following the release of this month’s more optimistic consumer sentiment report, consumers and markets have again been reminded of the threat of inflation, with recent figures from the August US consumer price report demonstrating that inflation is in fact moving in the wrong direction in the US with inevitable parallels being drawn to the situation in our domestic economy. Inflation remains a serious challenge for retailers, consumers and the broader economy.
Source: Westpac – Melbourne Institute Consumer Sentiment Index
Consumer sentiment rebounded slightly in September 2022, increasing by 3.9% to 84.4, following nine consecutive months of decline, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was conducted shortly after the RBA announced a further 0.5% lift in the cash rate to 2.35%, meaning consumers may have been expecting a higher increase or they are more “steeled” to increases. Lower petrol prices and the very strong job market were also noted as potential reasons for the improvement. Whilst the improvement is a positive, the index remains firmly in pessimistic territory, with many of the factors that have contributed to the recent decline expected to continue well into 2023.
Source: Australian Bureau of Statistics
The most recent ABS retail sales data for July 2022 reports a 1.3% increase in sales. July 2022 sales were $4.91 billion higher than July 2021 sales (+16.5% vs July 2021, +12.7% vs July 2020), noting sales likely incorporate a level of inflation. Interestingly, the strength in retail sales was driven by strong improvements in discretionary categories including department store (+3.8%) and clothing, footwear, and personal accessory retailing (+3.3%), while household goods experienced a decline (-1.1%). The resilience in spending has been a surprise to some however we note there have been two additional interest rate hikes since July 2022. That said, more recent spending data also shows that despite consumer sentiment falling through August, late-August EFTPOS card spending data from CBA and Westpac suggests that interest rates have only led to a slowing of growth in spending so far as opposed to a contraction.
Online retail sales
Source: NAB Online Retail Sales Index
Online retail sales recorded a sixth consecutive month of decline in July 2022 (-1.4%, seasonally adjusted), and remains significantly down in year-on-year terms due to exceptionally strong growth in July 2021 (-7.3% v July 2021). Most categories recorded contractions in July 2022, with personal and recreational experiencing the largest contraction (-4.1%), despite this category recording the monthly growth in June 2022. Online retail sales are estimated to represent 14.5% of total retail sales or approximately $56.01 billion in the twelve months to July 2022 and are approximately 13.6% higher than the 12 months to July 2021. While COVID continues to have impacts on individuals, there is good reason to think that the potential for large scale disruption is largely behind us and life has increasingly “returned to normal”. Retailers have witnessed this slight shift back towards pre-COVID-19 shopping trends, however cost inflation and contractionary pressures on the economy are forming new issues for retailers.