Consumer sentiment stabilises but remains pessimistic

According to the Westpac-Melbourne Institute survey, consumer sentiment increased by 4.1% to 83.9 in July 2026, after reaching near multi-decade lows in June. Despite the improvement, confidence remains firmly in pessimistic territory, reflecting ongoing pressure on household finances and continued uncertainty around the economic outlook. Westpac noted that consumers appeared more comfortable that worst-case scenarios for fuel prices, interest rates and employment had not materialised, although cost-of-living pressures continue to weigh on spending decisions. The survey was taken in early July so more recent events in the Middle East have likely tempered that improvement again.

For retailers, conditions remain challenging. Households continue to prioritise value, with the latest ABS Household Spending Indicator showing spending increased 1.3% in May 2026 as consumers took advantage of EOFY sales. While promotional activity supported discretionary spending, the continued weakness in consumer confidence suggests retailers are likely to remain reliant on major sales events to stimulate demand. Balancing margin preservation with increasingly price-conscious consumers will remain a key challenge.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac-Melbourne Institute survey, consumer sentiment increased by 4.1% from 80.6 in June 2026 to 83.9 in July 2026. While confidence rebounded from June's near multi-decade low, the result remains among the weakest recorded in the survey’s history, highlighting that households remain deeply pessimistic and sensitive to interest rates and fuel prices. The improvement appears to reflect easing concerns (at the time) around fuel prices, escalating geopolitical tensions and the prospect of further interest rate increases, rather than any meaningful improvement in underlying household conditions. Many of the prevailing conditions at the time of the survey have since deteriorated (fuel prices, interest rate outlook) so sentiment today is likely lower.

The sub-indexes all improved in July, however remain below long term averages:

• 'family finances vs a year ago' up 5.6% to 71.1;

• 'family finances next 12 months' up 13.4% to 96.5;

• 'economic conditions next 12 months' up 0.6% to 78.3;

• 'economic conditions next 5 years' up 0.7% to 87.1; and

• 'time to buy a major household item' up 0.5% to 86.8.

The largest improvement was in the forward-looking family finances subindex, suggesting households were slightly more optimistic that current cost-of-living pressures would ease over time. However, current financial conditions remain extremely weak, with the 'family finances vs a year ago' index sitting at 71.1, reinforcing that many households continue to feel significant financial strain. The most recent instability in the Middle East will have further impacted those pressures.

While expectations for further interest rate increases eased modestly at the time of the survey, around 60% of consumers still expected mortgage rates to rise over the next year. We note that following more recent unemployment figures the financial market expectations for a rate rise are higher than 60%. Separately, the House Price Expectations Index fell a further 8.0% to 118.0, its lowest level in three years, indicating households are becoming increasingly cautious about the outlook for residential property values. Overall, the July survey suggests the modest but fragile improvement in sentiment, with downside risks rather than renewed optimism.

Source: Australian Bureau of Statistics

The most recent ABS Household Spending Indicator (ABS HSI) recorded a 1.3% increase (seasonally adjusted) in May 2026, offsetting the 1.1% decrease recorded in April. Household spending remained 5.5% higher than May 2025, and inflation was recorded at 4.0% to May 2026, showing the continued impact of inflation. The increase in May (from April) was largely attributable to increases in clothing and footwear and miscellaneous goods and services as consumers make the most of the EOFY sales to score a bargain on discretionary goods.

Household spending increased across all spending categories during the month:

• ‘Clothing and footwear’ up 2.7%

• ‘Miscellaneous goods and services’ up 2.2%

• ‘Hotels, cafes and restaurants’ up 1.9%

• ‘Transport’ up 1.4%

• ‘Food’ up 1.1%

• ‘Alcoholic beverages and tobacco’ up 1.0%

• ‘Furnishings and household equipment’ up 0.8%

• ‘Recreation and culture’ up 0.8%

• ‘Health’ up 0.2%

As noted earlier, the increase in May 2026, which was driven primarily by ‘clothing and footwear’ (+2.7%), and ‘miscellaneous goods and services’ (+2.2%) as consumers took advantage of EOFY sales to purchase winter clothing and other discretionary goods. Spending on ‘hotels, cafes and restaurants’ (1.9%) also increased, primarily driven by restaurant meals, takeaway and catering services.

The overall 1.3% increase in the ABS HSI in May 2026 reflected a 2.1% increase in discretionary spending and a 0.2% decrease in non-discretionary spending.