Consumer sentiment jumps but remains below neutral territory

According to the Westpac–Melbourne Institute Index of Consumer Sentiment, consumer sentiment increased 4.0%, from 92.2 in February 2025 to 95.9 in March 2025, reaching a three-year high.  In recent months, consumer sentiment has been heavily correlated with news around interest rate expectations and the improvement in sentiment seen throughout most of 2024 had plateaued. The 25-basis point rate cut in February 2025 sparked the rise in sentiment in March, however we believe the impact on discretionary spending will lag by at least 3-4 months (and a may require a further rate cut).

The most recent ABS retail sales data showed a 0.3% increase in January 2025, following a slight decline in December of 0.1%. We note that January 2025 sales were 3.9% higher than January 2024. The increase in sales can be attributed to the post-Christmas promotional period and increase in seasonal spending on summer events such as the Australian Open and cricket matches. NAB Online Retail Sales remained steady in January 2025 after a marginal increase of 0.2% in December.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac–Melbourne Institute Index of Consumer Sentiment, consumer sentiment increased by 4% from 92.2 to 95.9 in March 2025; a three-year high for the index.  The RBA’s decision to cut the cash rate by 25 basis points in February 2025 provided a significant lift to consumer sentiment and re-started the momentum seen in the second half of 2024, following a plateau between December 2024 and February 2025.  

The sub-indexes all increased in March 2025:

• ‘time to buy a major household item’ (+6.9%) to 97.1;

• ‘economic conditions next 5yrs’ (+4.0%) to 101.5;

• ‘economic conditions next 12mths’ (+3.6%) to 96.0;

• ‘family finances next 12mths’ (+3.2%) to 108.3; and

• ‘family finances vs a year ago’ (+2.1%) to 76.7.

The largest month-on-month increase was seen in the buyer sentiment index, which rose 6.9% from 90.9 to 97.1 in March 2025.  While the sub-index is significantly below historical levels and has been entrenched in the pessimistic range for the past two years, the impact of cost-of-living pressures on discretionary spending appears to be subsiding.  The economic conditions sub-indexes also showed notable gains in both the short- and long-term outlooks.  This was likely driven by positive news surrounding cost-of-living pressures and confirmation of rising annual GDP; the first per capita raise since 2022.  

The family finances index next 12 months also rose notably by 3.2%, while backwards-looking index also increased, it remains at 76.7 which is significantly below the long-term average of 88.0.  These indices suggest that there is optimism about the future but things are still tough at the moment.

Source: Australian Bureau of Statistics

The most recent ABS Retail sales data recorded a 0.3% increase (seasonally adjusted) in January 2025; this represents a c. 3.9% or $1.4bn increase in sales from January 2024.  Growth in January was partially driven by food-related sales, with large-scale events such as the Australian Open and summer cricket matches boosting spending on catered events.

All subcategories, aside from ‘household goods retailing’, rose in January 2025:

• ‘other retailing’ (+2.4%)

• ‘clothing, footwear and personal accessory retailing’ (+2.0%)

• ‘cafes, restaurants, and takeaway food services’ (+1.1%)

• ‘food retailing’ (+0.7%)

• ‘department stores’ (+0.6%)

• ‘household goods retailing’ (-4.4%)

Notably, the sharp decline in household goods spending follows four consecutive months of growth driven by heavy retailer discounting and earlier Black Friday, Cyber Monday and Christmas related sales events.  Clothing, footwear and personal accessory retailing rebounded in January 2025 following a 1.8% decline in December 2024. This was driven by clothing-related sales which increased 2.4%; a likely result of the beginning of end-of-season clearance events. We suggest that pre-Christmas sales represent a time for spending on discounted big-ticket items and presents for others, while the January sales are for personal shopping.

On a geographical basis, all states except New South Wales (-0.3%) recorded sales increases.  Growth in January was led by Tasmania (+0.7%), South Australia (+0.9%), Australian Capital Territory (+0.7%) and Victoria (+0.6%).  Growth in the second largest sales state, Victoria, was partially driven by increased supermarket spending as supply chains reverted to normal following major strike-related disruptions in December 2024.

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales in January 2025 remained unchanged, following a revised increase of 0.1% in December 2024 (previously 0.2%). Growth slowed but remained high in year-on-year terms, with seasonally adjusted sales increasing 12.7% between January 2024 and January 2025. The results by category were mixed, with grocery and liquor (+5.9%) rebounding after a decrease in December. This was the only category to accelerate on year-on-year terms. January's steady result follows a strong November, boosted by Black Friday and Cyber Monday, with sales over the 3-month period accelerating to 8.2% growth from the prior period. Online retail sales are estimated to total $60.5 billion and represent 13.9% of retail sales reported by the ABS during the 12 months to January 2025.