Consumer relief as RBA takes a break from rate hikes

17 April 2023

Consumer sentiment increased by 9.4% in April 2023 to 85.8, following two consecutive months of sub-80 reads, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was undertaken in the week the RBA provided relief to consumers by pausing their record run of consecutive interest rate rises which appeared to play a significant role in the improved sentiment. The pause was widely anticipated, however the RBA gave forewarning that the current 3.6% cash rate should not be considered the cash rate peak. The 6.8% February 2023 annual inflation results reported by the ABS, a second consecutive decline since the 8.4% peak in December 2022, also provided some relief to consumers. The RBA rate rises do appear to be having an impact as evidenced by the minimal 0.2% increase in the February 2023 ABS retail sales results. The NAB Online Retail Sales Index also recorded growth in February 2023 (+1.3%, seasonally adjusted), however shows a downturn in spend year-on-year (-2.9% vs February 2022).

Consumers are prioritising their spending choices among discretionary categories with demand for certain goods and services fluctuating. For instance, the demand for travel remains a focus among Australians as the costs associated with this start to ease. The recent Easter 2023 long weekend was an example of this with consumers expected to spend an estimated $9.1 billion on travel. Other retailers should remain pragmatic and nimble, ensuring cost-minimisation is front of mind while also differentiating their offering where they can. As the cost of cybercrime continues to increase, businesses need to ensure they are resilient to attacks, which requires investment in systems. Retailers are facing downward pressure on revenue and increasing input costs requiring a focus on cash flow, which will likely lead to an increase in promotions to convert inventory to cash. Not only will this clear stock for the new season, but shore-up cash flow required to maintain ongoing operations. Investing in a quality online offering is also still important to differentiate the retailer. Whilst there has been a rebalance back to brick and mortar, online remains an opportunity for growth. Recent retail trade insolvencies reveal financial pressures are not affecting one single type of retailer, rather different sub-categories of retail including fashion, skincare, and consumables.

Consumer confidence

  • vs prior month - 9.4%

  • vs pcp - (10.4%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment improved in April 2023, recording an increase of 9.4% to 85.8, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The current index is the highest recorded since June 2022 (86.4) yet remains 10.4% below the April 2022 index of 95.8. Despite the index recording an improvement, consumer sentiment continues to remain deeply pessimistic with Westpac’s chief economist noting that weaker spending is expected to continue throughout 2023 and the first half of 2024. All sentiment sub-indexes recorded increases in April 2023, with the largest increase (+16.5%) recorded in the ‘economic conditions next 12 months’ sub-index. This follows the 2.3% decline in this sub-index last month reflecting the variability in consumers’ short-term outlook. The ‘time to buy a major household item’ remains troubling despite experiencing a 9.5% increase to 82.1 (-16.4% vs April 2022) following the weakest read ever recorded last month (74.9). Although the sub-index reveals the increased costs of borrowing are affecting household budgets, the labour market has provided some positives. The Westpac-Melbourne Institute Unemployment Index fell 3.3% to 118.9 in April 2023, with the decline showing improvement of consumers’ assessments of the labour market. Some positivity was also seen in the indices tracking house prices. With a 0.25% cash rate increase still possible in May 2023, the upbeat sentiment may be short-lived as money directed to discretionary spending is required to offset a further monthly mortgage repayment increase.

Retail sales

  • vs prior month - 0.2%

  • vs pcp - 6.4%

  • 12 months v pcp - 11.2%

Source: Australian Bureau of Statistics

The most recent ABS retail sales data for February 2023 reported a slight 0.2% increase (seasonally adjusted), following a 1.8% increase in January 2023. This modest increase represents a calming of the growth experienced between the November 2022 and January 2023 sales period, as discretionary spending pulls back, and consumer confidence remains deeply pessimistic. February 2023 retail sales are $2.1 billion higher than February 2022 sales (+6.4% vs February 2022, +16% vs February 2021, +26.5% vs February 2020). The February result means that sales grew by 11.2% in the 12 months to February 2023. February’s growth was bolstered by slight increases in ‘department stores’ (+1.0%) and ‘clothing, footwear and personal accessory retailing’ (+0.6%) categories. Whilst a shallow increase at first glance, the growth is in addition to the rebound of these categories in January 2023 (+8.6% and +6.7%, respectively). The CBA data for card spending also points to moderation of spend, attributing the current growth to population growth (+1.7%) and price rises as influenced by the 6.8% CPI inflation. As the burden of the rate rises and cost of living pressures persist, spending growth for both goods and services are expected to continue to soften in coming months. There remains some bifurcation of consumer spending with higher-income consumers having protection from the increasing cost-of-living pressures. A level of aspirational demand for luxury items also exists which may support some spending on luxury goods and services.

Online retail sales

  • vs prior month - 1.3%

  • vs pcp - (2.9%)

Source: NAB Online Retail Sales Index

Following a return to growth in January 2023, the NAB Online Retail Sales Index recorded a second consecutive month of growth in February (+1.3%, seasonally adjusted). Despite the slight month-to-month improvement, online retail sales were down in year-on-year terms (-2.9% v February 2022). The largest monthly growth in February was in personal and recreational spending (+8.5%), grocery and liquor (+5.1%) and games and toys (3.1%). That growth was offset by retractions in takeaway food (-4.2%), media (-2.7%) and department stores (-2.6%).  It is also noted that the largest sales category, homewares and appliances, contracted for a ninth month in year-on-year terms despite experiencing monthly growth (+1.2%). For the most part, metropolitan areas fared better than those in regional areas in February 2023. Online retail sales in the 12 months to February 2023 totalled $52.81 billion and are estimated to represent approximately 12.8% of the total retail sales (-3.4% v the 12 months to February 2022). The rebalancing of sales back to in-store sales continues, however online remains the key opportunity for growth.