Consumer sentiment plunges following rate hike and Federal Budget announcement

Consumer sentiment decreased by 7.9% in May 2023 to 79.0 according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was undertaken in the week during the release of the Federal Budget and the week after the RBA announced a 0.25% interest rate rise (after the previous month’s pause). The most recent ABS Retail Sales have recorded a modest 0.4% increase in March 2023, driven by an increase in food related spending (largely due to high food inflation). The ABS data also showed a slow in non-food related spending. Similarly, the NAB Online Retail Sales Index recorded a 0.2% decline in March 2023.

In response to continuing cost of living pressures, we are seeing consumers begin to adjust their spending habits as they become increasingly value-conscious, pulling back on discretionary spend and trading down in non-discretionary categories. This will create some challenging months ahead for retailers, who will need to “batten down the hatches’’ by focusing on clearing stock and carefully managing cash. While sentiment is deeply pessimistic, there is still a willingness from consumers to spend in the market. High-end consumers are holding up well, as they are less impacted by rising rates and cost of living pressure. For cost-conscious consumers, there is increasing evidence that these consumers are “down-trading” within categories – choosing private-label items or discounted groceries to cut down on cost and maximise perceived value – rather than reducing volumes or frequency of spend. Retailers who remain close to customers to understand their needs and can emphasise value for money, including through tactical deployment of pricing and promotions initiatives, will be best positioned to capture consumer share of wallet in the current environment.

Consumer confidence

• vs prior month - (7.9%)

• vs pcp - (12.6%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment recorded a steep 7.9% decline to 79.0 in May 2023, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The decline, which was the index’s biggest drop since August 2020, largely reversed the 9.4% gain seen in the prior month and returned the Index to close to the deeply pessimistic levels seen in March 2023 (78.5). The survey was undertaken in the week during the announcement of the Federal Budget and a week after the RBA’s interest rate increase announcement. Sentiment reads were higher amongst those surveyed before the budget announcement (81.3, -5.3%), compared to those surveyed after (75.3, -12.7%). Despite the Federal Budget including $14.6 billion specifically allocated to cost-of-living relief, the fall in sentiment post-announcement indicates the budget did not meet consumer expectations to deliver on cost-of-living relief. The largest post-budget announcement sentiment declines were recorded in the sub-groups who are most dependent on cost-of-living relief and those who have most at stake around inflation, including those with low incomes (-15%), renters (-13%) and mortgagors (-10%). Declines were recorded in all component indices, with the largest falls in views around family finances and expectations for the economy, including the ‘finances compared to a year ago’ subindex (-10%), the ‘finances, next 12 months’ subindex (-10.2%), the ‘economy, next 12 months’ subindex (-9.5%) and the ‘economy, next 5 years’ subindex (-9.2%).

Retail sales

• vs prior month - 0.4%

• vs pcp - 5.4%

• 12 months v pcp - 10.8%

Source: Australian Bureau of Statistics

The ABS retail sales recorded a subtle 0.4% increase March 2023 (seasonally adjusted), following the 0.2% increase in February 2023. March 2023 retail sales are $1.8 billion higher than March 2022 sales (+5.4% vs March 2022, +15.2% vs March 2021, +17.9% vs March 2020). This is the third consecutive increase in retail sales, however the ABS has noted that a pull-back in spending on discretionary items has seen monthly spend remain at a similar level to 6 months ago. This month’s growth was driven by food related spending, with growth recorded in the ‘cafes, restaurants, and takeaway food services’ (+1.5%) and ‘food retailing’ (+1.0%) categories. Food retailing has now recorded 13 consecutive monthly seasonally adjusted increases, however this is largely driven by high food inflation. Cafes, restaurants, and takeaway food services have benefitted from the ongoing momentum in the “out-of-home” economy, including the return of large-scale sporting events (i.e., NRL and AFL) and cultural events. Despite the strong performance in food related spending, Westpac’s card tracker data for mid-April shows that the hospitality-led lift in March is showing early signs of diminishing. Spending on non-food retailing has slowed in response to interest rate rises and increased cost of living pressures, with ‘clothing, footwear and personal accessory retailing’ (-1.0%) recording the largest fall, followed by household goods (-0.4%) and department stores (-0.2%). With the resumption of the interest rate tightening cycle in May, it is expected that we will see continued pressure on spending in discretionary categories over the coming months.

Online retail sales

• vs prior month - (0.2%)

• vs pcp - (2.4%)

Source: NAB Online Retail Sales Index

Following two consecutive months of growth, the NAB Online Retail Sales Index recorded a small decline of 0.2% (seasonally adjusted) in March 2023. The monthly contraction in online sales was driven by the ‘homewares and appliances’, ‘grocery and liquor’ and ‘department stores’ categories, which outweighed the growth that was recorded in all other categories. Online sales contracted compared to March 2022 (-2.4%), largely driven by the ‘homewares and appliances’ category, however the trend appears to be moderating as the base effects of the prior two years subside. Growth in Tasmania (+5.5%), Northern Territory (+3.1%), Queensland (+1.2%) and Western Australia (0.5%), was not enough to counter the declines recorded in South Australia (-2.0%), Victoria (-1.2%), the ACT (-0.8%) and New South Wales (-0.5%). The decline in monthly growth has hit domestic retailers harder, as international retailers continue to record growth. Online retail sales in the 12 months to March 2023 totalled $52.7 billion and are estimated to represent approximately 12.7% of the total retail sales (-4.4% v the 12 months to March 2022).

For more on what we expect to see in 2023 in the retail industry based on our analysis of how 2022 played out, see the McGrathNicol Year in Review report here.