Consumer sentiment lifts off deeply pessimistic lows

06 March 2024

Consumer sentiment remains pessimistic despite increasing 6.2% to 86.0 in February 2024 (the highest index in twenty months), according to the Westpac-Melbourne Institute Index of Consumer Sentiment. While the most recent ABS Retail Sales data reported December 2023 sales dollars being broadly in line with December 2022, the seasonally adjusted result represented a decrease of 2.7% compared to November, reflecting strong November sales driven by the pull forward of Christmas spending to the November sales events. Similarly, NAB Online Sales also decreased on a seasonally adjusted basis in December 2023, declining by 3.9% compared to November 2023. The decreases experienced in December follow trends of consumers bringing forward spending to November to take advantage of Black Friday and Cyber Monday sales. The well publicised cost-of-living pressures likely increased the pull forward as consumer looked for value for money. Although trading conditions were slower in early December, retailers noted that sales increased again in the lead up to Christmas and the Boxing Day sales, where promotion intensity remained high. “Swift-onomics” and the interest in Taylor Swift concerts (and associated costs for attendees) exemplifies the “war for wallet” that retailers are currently facing, not only competing against other retailers for consumer spend but also against other industries and experiences. Retailers need to remain strategic in their pricing decisions, with consumers increasingly “sales hacking” and planning their spending around discounting periods. At the same time, retailers will also need to navigate cost pressures, higher wages, prolonged sales periods, and supply chain issues arising from the Red Sea delays. For further detail on what to expect in 2024, refer to McGrathNicol’s 2024 Forecast.

Consumer confidence

  • vs prior month - 6.2%

  • vs pcp - 9.6%

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment remains pessimistic despite increasing 6.2% to 86.0 in February 2024, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. This is the highest monthly gain since April 2023, when the RBA first paused its interest rate rises following ten consecutive hikes, and the highest index read since June 2022 (86.4). The primary drivers for the increase are moderating inflation and interest rate expectations, and an anticipation of tax cuts in the second half of 2024. There was a pull-back in sentiment among those surveyed after the RBA’s February announcement of an unchanged cash rate compared to those surveyed prior to the decision (80.0 v 94.1, respectively), with many consumers anticipating a more optimistic message that inflation was being managed and interest rates may decrease within the year, but the RBA messaging was more down-beat, not ruling out the possibility of further increases. Despite this, the Westpac-Melbourne Institute Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, declined 17.3% to 121.6. This is the lowest reading since August 2020, with 44% of consumers expecting rates to be the same or lower over the next 12 months. All sentiment sub-indexes increased in February 2024, led by improvements in the ‘time to buy a major household item’ sub-index (+11.3%) (which has been the main index to capture cost-of-living pressures on consumers in the last 2 years) and the ‘economic conditions next 12 months’ sub-index (+8.8%). The announcement of the re-jigged Stage 3 tax cuts has provided a mixed response to ‘finances, next 12 months’ sub-index (+2.4%), with middle-income earners benefitting more, while higher-income bands will see smaller gains than previously anticipated. Housing-related sentiment also improved in February, with the ‘time to buy a dwelling’ index increasing 3% to 74.2 (yet remains in the weak 72-76 range, with investment property owners having the only positive view with a reading of 106). The Westpac-Melbourne Institute Index of House Price Expectations rose by 2.1%, with just under 69% of consumers expecting prices to continue increasing this year.

Retail sales

  • vs prior month - (2.7%)

  • vs pcp - 0.8%

  • 12 months v pcp - 3.1%

Source: Australian Bureau of Statistics

The most recent ABS retail sales decreased by 2.7% (seasonally adjusted) in December 2023, following a revised increase of 1.6% in November 2023. The sharp decline in turnover was largely driven in discretionary categories, offsetting the gain experienced in November due to the key sales events and the ongoing trends of pull forward of Christmas spend. By category ‘household goods’ (-8.5%), ‘department stores’ (-8.1%) and ‘clothing footwear and personal accessory retailing’ (-5.7%) experienced the largest declines. Despite ‘household goods’ declining in December, this industry is expected to rebound in 2024, driven by population growth. For food-related industries, turnover fell in ‘cafes, restaurants, and takeaway food services’ (-1.1%), while ‘food retailing’ (0.1%) was the only industry to increase. Eating out has slowed down among consumers with expectations that this will remain weaker in 2024. Retail turnover fell across all states, the majority down by more than 2%, with ACT and WA both decreasing by 3.8%. Retail sales growth of 3.3% in 2023 was largely driven by inflation (ABS reported inflation of 3.4% in the 12 months to December 2023). Volumes remained resilient with a marginal increase of 0.3% (seasonally adjusted) in the December 2023 quarter, marking a reversal from the revised 0.1% decrease in the September 2023 quarter. When considering the effects of both population and price growth, sales volumes per capita have fallen every quarter since June 2022. In comparison to December 2022, retail sales increased by 0.8%, likely attributable to inflation and population growth.

Online retail sales

  • vs prior month - (3.9%)

  • vs pcp - 11.4%

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales decreased by 3.9% in December 2023 (seasonally adjusted), after strong November 2023 and October 2023 sales growth of 6.5% and 3.4%, respectively. Despite the seasonally adjusted decline, December 2023 sales dollars were 11.4% above December 2022 (seasonally adjusted). The recent trend of spending being pulled forward to November in connection with key promotional events remains evident, with NAB noting that the dollars spent in November 2023 are about 1.5 times the sales of the average month for the rest of the year. The contraction in December 2023 was experienced across all categories, with the largest declines broadly aligning with the trajectory of the ABS sub-categories. Online retail sales were particularly influenced by homewares and appliances (-6.9%), games and toys (-4.8%), and department stores (-4.3%) – which all led growth in November 2023 so is more of a symptom of strong November performance rather than specific weakness in December. Online retail sales are estimated to total $55.11 billion and represent 13.0% of retail sales reported by the ABS during the 12 months to December 2023 (also 13.0% in the 12 months to December 2022).

The moderate growth of 2.8% in online retail sales across 2023 and underperformance compared to traditional retail sales (+3.3%) suggests a continued trend of reversion to historical behaviour with consumers increasingly returning to in store shopping.