Cost of living pressures cause sentiment to plummet

16 February 2023

Consumer sentiment fell by 6.9% in February 2022 to 78.5, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was undertaken in the week the RBA delivered a ninth consecutive interest rate rise to 3.35% (a ten-year high). Sentiment of those surveyed after the announcement was at 74.8. Despite the interest rate rises, inflation reached a 32-year high, to 7.8% over the December 2022 quarter, highlighting the ongoing (and worsening) pressures on costs of living. While the most recent ABS retail sales data for December 2022 recorded a 3.9% seasonally adjusted decline, December 2022 sales were 7.5% ($2.39 billion) higher than December 2021 sales. The NAB Online Retail Sales Index recorded a sharp decline of 4.6% (seasonally adjusted) in December 2022. Both retail and online sales in December 2022 were impacted (on a seasonally adjusted basis) by a strong November 2022 result, which was driven by record-breaking cyber sales events.

With the RBA flagging further interest rate rises, there is no immediate relief from cost of living pressures, so it is expected that consumers will pull back on spending, ending a sustained period of robust spending. This is expected to strongly impact operators in the middle market within discretionary categories. While shipping costs have started trending down and supply chains are stabilising, oil and energy costs remain elevated and labour costs and workforce absenteeism / shortages continue to affect both reliability of supply and prices for retailers. Against this backdrop, flexibility will be a key factor for retailers’ success. Retailers will need to be able to quickly pivot on strategy, adjust pricing and margins when needed, develop versatile and resilient supply chains and will need to remain close to financiers so flexible financing arrangements are in place.

Consumer confidence

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment plummeted by 6.9% in February 2023 to 78.5, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. After some uplift in the Christmas and New Year period, this steep fall has returned sentiment close to the historic lows recorded in November 2022 (78.0) and below peak pessimism during the GFC (79.0). While the RBA’s decision to raise the cash rate was generally anticipated, there was a significant variance between those surveyed before the announcement (83.5), compared to those surveyed after (74.8). The post-announcement negative response is likely a reaction to the RBA’s statement about more raises to come, with 80% of consumers surveyed indicating they expect rates will continue to rise in the coming months. A similar result occurred with the ‘House Price Expectations’ index, with a stark contrast recorded between pre-RBA announcement results (117.2) and post-announcement results (92.7), further revealing consumer sensitivity to rate rises. Rising rates will inflict further pressure on household budgets, compounding existing cost of living pressures.

Consumer concern regarding cost of living was reflected in several sentiment sub-indexes. The ‘family finances vs a year ago’ subindex fell by 8% to 62.1, a level not seen since the early-1990s recession. This sub-index read amongst consumers with a mortgage was 55.4 (-14.4%), one of the lowest responses recorded in the history of the survey (which goes back to the mid-1970s). The ‘time to buy a major household item’ subindex recorded the steepest fall of all the subindexes to 78 (-10.1%), which is well below the long run average of 126. The ‘economic outlook, next 12 months’ subindex decreased 7.7% to 75.1, indicating that consumers expect 2023 to be a very challenging year. While confidence around jobs remains in positive territory, the Westpac-Melbourne Institute Unemployment Expectations Index jumped 10.6%, from 108 to 119.4 in February, marking an 18 month-high (noting that a higher index reads mean more consumers expect unemployment to rise in the year ahead). This suggests that confidence in the labour market is beginning to be rattled and hints at a sustained deterioration. In this environment, it is likely that consumers will become increasingly ‘value-conscious’. To capture consumer spend, retailers will need to maintain focus on pricing, value proposition, consumer relevance and customer experience.

Retail sales

Source: Australian Bureau of Statistics

The most recent ABS retail sales data for December 2022 reported a steep fall of 3.9% (seasonally adjusted), the first decline after 11 consecutive months of growth. Despite the seasonally adjusted decline, December 2022 sales were 7.5% ($2.39 billion) higher than December 2021 sales (+12.9% vs December 2020), with most of the growth driven by inflation rather than volume. Retail sales in 2022 totalled $411.5 billion and were 11.4% higher than 2021 (vs CPI of 7.8%). The ABS has acknowledged that elevated spending patterns around Black Friday and Cyber Monday sales have impacted seasonality and contributed to the large seasonally adjusted monthly fall reported in December, as consumers increasingly pull forward Christmas spend to take advantage of the sales events. Reflecting the likely effects of Black Friday sales, the biggest month-on-month falls in spending were in department stores (-14.3%), clothing and footwear (-13.1%) and household goods (-7.8%). Despite the impact of record-breaking November sales (which were 7.7% above November 2021), the 7.5% growth in December 2022 vs December 2021 and the seasonally adjusted fall indicates some slowdown in consumption driven by cost-of-living pressures. The ABS retail sales data for January 2023 will provide further insights into whether monetary tightening is starting to weigh on consumption (rather than just sentiment).

Online retail sales

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales Index recorded a sharp decline of 4.6% (seasonally adjusted) in December 2022, partially reversing November’s gain of 5.8%. In year-on-year terms (i.e., compared to December 2021), online retail sales were down (-2.5%), albeit not to the extent observed between August and October (due to the lockdown enhanced growth in these months in 2021). The categories that recorded the largest seasonally adjusted month-on-month declines were the more discretionary categories, including department stores (-8.2%), homewares and appliances (-7.3%) and fashion (-5.8%). Takeaway food and media recorded growth in December 2022, however their improvement was insufficient to offset the fall in the larger sales categories. Online retail sales in the 12 months to December 2022 totalled $53.26 billion and are estimated to represent approximately 13% of total retail sales (similar to the levels in December 2021). The month-on-month decline is largely expected, given the strong November results driven by the Black Friday to Cyber Monday weekend sales. NAB data shows $5.9 billion was spent during this 4-day trading period (+8% v 2021), and around 25% of this spend occurred online.