Interest rate uncertainty continues to challenge retail growth

29 July 2024

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Consumer sentiment declined by 1.1% to 82.7 in July 2024, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The most recent ABS retail sales increased by 0.6% (seasonally adjusted) in May 2024, as some shoppers began taking advantage of early end-of-financial year discounts and sales events. Despite this seasonally adjusted increase, underlying spending remains flat in trend terms, reflecting ongoing weakness in consumer discretionary demand and spending in recent months. NAB Online Sales slowed in May, contracting 1.6% following a slightly revised April result (1.1% vs. the previously reported 1.3%). As we approached the end of the financial year, we saw retailers double down on sales and promotional events to reinvigorate discretionary spending, with 'value' remaining a top priority for consumers. Margin pressure will likely persist however many retailers will aim to bolster cash reserves and refresh inventory for later in the year when some anticipated tailwinds linked to the Stage 3 tax cuts are converted to spending. Inflationary pressures remain persistent with CPI at 4.0% for the 12 months to May 2024 (seasonally adjusted). The linkage to interest rates remaining higher for longer (and maybe increasing), suggests that consumers will remain cautious with their spending, opting for purchases only when significant deals are available or when they see something they ‘must have’. The upcoming August RBA announcement will be highly anticipated. Moving into the second half of the year, the priority for retailers will be to understand their customers' needs and preferences to offer value. Differentiation can no longer depend solely on price; particularly as major retail players have begun adopting similar strategies.

Consumer confidence

  • vs prior month - (1.1%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment fell by 1.1% to 82.7 in July 2024, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. This decline continues the trend of deeply pessimistic sentiment that has persisted for over two years. Ongoing concerns about persistent inflation and potential further interest rate rises continue to overshadow the positive effects of Stage 3 tax cuts and other fiscal support measures. The sub-indexes showed largely mixed results for July. ‘Family finances vs a year ago’ experienced an 8.4% drop to 63.5, erasing almost all of last month’s gain of 9.7%, while ‘family finances next 12 months’ dropped 4.5% to 92.1. The falls in both family-finance related indexes marks a reversion to their weakest levels recorded since November last year. On the other hand, ‘economic conditions next 12 months’ (+3.6%), ‘time to buy a major household item’ (3.1%) and ‘economic conditions next 5 years’ (+0.5%) all increased, indicating a more positive outlook around spending habits and the broader economy. That said, all sub-indexes remain very pessimistic. The Westpac-Melbourne Institute Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, increased 12.8% in July 2024, with 60% of consumers now expecting a mortgage rate increase in the next 12 months.

Retail sales

  • vs prior month - 0.6%

  • vs pcp - 1.4%

  • 12 months v pcp - 1.9%

Source: Australian Bureau of Statistics

The ABS Retail Sales data for May 2024 showed a seasonally adjusted increase of 0.6%, while May 2024 sales were 1.4% or $0.5 billion higher than May 2023 sales. The month-on-month improvement was driven by steady growth in most categories including ‘clothing, footwear and personal accessory retailing’ (+1.6%), ‘household goods retailing’ (+1.1%), ‘food retailing’ (+0.7%) and ‘other retailing’ (+0.2%), however this was partially offset by declines in ‘department stores’ (-0.9%) and ‘cafes, restaurants, and takeaway food services’ (-0.1%). The return to growth follows underwhelming March (-0.4%) and April (+0.1%) results, with the beginning of the mid-year sales period encouraging some shoppers to take advantage of early discounts and sales events. There continues to be evidence of pressure on the consumer wallet with a corresponding reduction in discretionary spending offsetting the increased spending on non-discretionary categories (non-discretionary spending has grown at 1.8% since May 2023, while discretionary spend has declined 1.9% over the same period). Retailers are anticipated to receive a slight boost from end-of-financial-year sales, though a substantial recovery in discretionary spending appears unlikely until consumers receive more positive messaging regarding inflation and cost-of-living improvements. On a regional basis, most states and territories recorded growth in retail volumes over May, while New South Wales (-0.1%) and South Australia (-0.1%) were the only states to experience declines. Stage 3 tax cuts and other state government policies aimed at easing cost-of-living pressures are expected to provide a welcome boost to households later in the year.

Online retail sales

  • vs prior month - (1.6%)

  • vs pcp - 9.0%

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales decreased in May 2024 by 1.6% (seasonally adjusted), following a rise in April 2024 of 1.3%. The seasonally adjusted May 2024 sales dollars were 9.0% above May 2023 sales. Most categories experienced a decline in May with ‘media’ (-3.5%) and ‘fashion’ (-3.0%) experiencing the most significant drops, partially offset by ‘takeaway food’ (+3.0%) which was the only category which recorded an increase. The year-on-year growth rate slowed this month, however when compared to the strong April 2024 result and the rebound in growth this time last year, monthly online sales growth continues to outpace broader retail growth in the same metrics Online retail sales are estimated to total $57.2 billion and represent 13.4% of retail sales reported by the ABS during the 12 months to May 2024.

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