Consumer sentiment remained deeply pessimistic in March 2023, with the Westpac-Melbourne Institute Index of Consumer Sentiment Index reporting levels of 78.5 for the second consecutive month. The survey was undertaken in the week the RBA delivered a widely anticipated tenth consecutive interest rate rise to 3.6%. While consumers have been highly sensitive to rate rises, the moderate response to the March rate rise is likely due to the RBA signalling that continuing rate rises at the same velocity are no longer certain. This was an adjustment to its guidance from February, which had implied multiple additional interest rate rises were on the horizon and followed a string of weaker-than-expected data, including a small decline in inflation to 7.4%, a surprisingly soft labour market read of 3.7% and slowed GDP growth in the December 2022 quarter (0.5%). Even if there were no further rate rises, cost-of-living pressures will continue for some time, with inflation not expected to reach its 2-3% target until mid-2025, and strong signals that energy and other “basics” will become more expensive in the near term. In the ABS data for January 2023, retail sales reported a slight 1.9% increase (seasonally adjusted), however this small improvement was not sufficient to reverse the substantial 4% seasonally adjusted decline in December 2022. A modest increase was also recorded in the NAB Online Retail Sales index, which increased by 0.6% (seasonally adjusted). In this high cost-of-living environment, consumer spending in store and online is expected to moderate further, particularly in discretionary categories. Low-income earners will be most significantly impacted by cost-of-living pressures, meaning they will be looking for discounts or ways to “trade down”, while high-income earners and others looking for little luxuries to treat themselves will continue to spend, with many retailers beginning to pivot towards a strategy of “premiumisation” to sustain higher price points. Retailers will also need to manage the effects of the “rebalancing” of consumer spending patterns to pre-pandemic behaviours, with spend on services and experiences continuing to grow and compete for consumers’ share of discretionary spend. The next twelve months will therefore be very different to the last twelve months, meaning recent trading won’t be a reliable indicator for future consumer purchasing behaviour. Retailers will need to carefully consider their customer base and value proposition model, as well as develop robust forecasts based on considered assumptions to navigate the headwinds of 2023.
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Source: Westpac – Melbourne Institute Consumer Sentiment Index
Consumer sentiment remained deeply pessimistic in March 2023, with the Westpac-Melbourne Institute Index of Consumer Sentiment Index reporting levels of 78.5 for the second consecutive month. Westpac’s chief economist noted that index reads at such a deeply pessimistic level are rare, with runs of multiple sub-80 reads having only been seen during the late 1980s / early 1990s recession. While several sentiment sub-indexes recorded declines in March 2023, the largest fall was recorded in the ‘time to buy a major household item’ sub-index, which decreased by 4% to 74.9, following a 10% fall in February. This is the weakest read for this sub-index recorded in the history of the survey, which has been undertaken since 1974 (apart from two brief declines during the GFC that were quickly reversed) and clearly shows the impact of higher borrowing costs on household budgets. Consumers’ short-term expectations are deeply pessimistic, with the ‘economic outlook, next 12 months’ and ‘family finances vs a year ago’ sub-indexes recording declines (-2.3% and -1.8%, respectively). Consumers are less pessimistic in the medium-term, with the ‘economic outlook, next five years’ sub-index recording a 5.6% increase to 95.3. The survey found that both mortgage holders and tenants were impacted after the RBA lifted the cash rate a quarter point to 3.60% in March. Renters, as a subgroup, recorded a steep decline of 14.7% in the ‘family finances vs a year ago’ sub-index. The impacts were also seen on homebuyers, with the ‘time to buy a dwelling index’ falling 11.1% to a 34-year low of 65.7. Despite the latest rise in interest rates and expectations of more to come, the Westpac Melbourne Institute House Price Expectations Index recorded an 8.6% increase to an 11-month high of 111.7. This mix of falling buyer sentiment and rising price expectations was particularly pronounced in NSW and Victoria. Consumers are expected to remain highly sensitive to inflation, interest rates and the economy, with c.85% of respondents to the March 2023 consumer sentiment survey viewing these topics as unfavourable. The Westpac-Melbourne Institute Unemployment Index rose by 2.9% to 122.9 in March, indicating that more consumers expect unemployment to rise in the year. While unemployment expectations are still below the long run average of 129, the increases recorded in February and March 2023 suggest labour market conditions are weakening. This is expected to heighten consumer sensitivity to cost of living pressures in the coming months and drive households to curtail their spend, particularly in discretionary categories.
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Source: Australian Bureau of Statistics
The ABS retail sales data for January 2023 reported a slight 1.9% increase (seasonally adjusted), partially rebounding from the substantial 4% seasonally adjusted decline in December 2022. January 2023 retail sales are $2.4 billion higher than January 2022 sales (+7.5% vs January 2022, +14.7% v January 2021, +27% v January 2020). The ABS has noted that November, December, and January are highly seasonal months of the year (impacted by the Christmas and January school holiday period) and these impacts have been heightened due to the increasing popularity of the November cyber event sales and escalating cost of living pressures, which have driven changes in usual consumer spending habits to focus on sale events. Looking through this volatility, the ABS has suggested that turnover is at a similar level to September 2022 and growth has been on average relatively flat over the past few months. In January 2023, retail turnover rose in all states and industries, with the largest increases recorded in ACT (+3.4%), VIC (+3%) and TAS (+2.7%), partially reversing the declines that were recorded in every state last month. Sales increased in all industries, with non-food related categories contributing the largest rebound, particularly ‘department stores’ (+8.8%) and ‘clothing and footwear’ (+6.5%). This improvement however only partially offset the steep seasonally adjusted declines recorded in December in those categories (-14.3% for ‘department stores’ and -13.1% for ‘clothing and footwear’). ‘Cafés, restaurants, and takeaway services’ reached a record high of $5.2 billion in January (+1.2% vs December 2022). CBA data for spending on bank cards suggests consumers have been spending steadily on services, particularly travel, rather than on goods covered by the ABS Retail Sales figures. With spending rebalancing towards services and continuing cost of living pressures, it is expected that retail sales growth will be subdued in 2023 and that volumes will be under pressure after adjusting for inflation.
Online retail sales
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Source: NAB Online Retail Sales Index
Following a 4.7% seasonally adjusted decline in December 2022, the NAB Online Retail Sales Index recorded a small increase of 0.6% (seasonally adjusted) in January 2023. Despite the slight month-on-month improvement, online retail sales were significantly down in year-on-year terms (-8.5% v January 2022). The largest monthly growth in January was in takeaway food (+7.8%), and department stores (+5.2%). Media (-2.4%), homewares & appliances (-2.1%), and personal and recreational spend (-1.2%) offset the extent of this growth. In year-on-year terms, only media (+16.1%), and takeaway food (+11.5) recorded growth. International retailers experienced faster growth compared to domestic retailers. Online retail sales in the 12 months to January 2023 totalled $53.31 billion and are estimated to represent approximately 13% of total retail sales (-1.4% v the 12 months to January 2022).