January fall underscores fragile consumer confidence

According to the Westpac-Melbourne Institute survey, consumer sentiment declined by 1.7% to 92.9 in January 2026, extending the 9% fall seen in December and pushing further into pessimistic territory. After hitting optimistic territory for the first time in 3.5 years in November 2025, there has been a material shift in sentiment with households focused on their financial position amid uncertainty around interest rates and the broader economic outlook.

With interest rates now expected to remain at current levels or potentially increase, consumers have reverted to a more cautious mindset. As a result, early 2026 will be a challenging period for retailers, with discretionary spending likely to require a stronger incentive to convert.

Retailers will need to lean more heavily on value-based levers to stimulate demand. This includes targeted discounting as well as a stronger focus on service, convenience and brand experience. Consumers appear increasingly willing to switch brands for better value, faster deliveries or easier returns, making personalised offers and differentiated experiences critical to maintaining loyalty in a highly price-sensitive market.

The most recent ABS Monthly Household Spending Indicator recorded a 1.0% increase in November 2025, up 6.3% year-on-year, supported by discretionary spending as households responded to Black Friday promotions, particularly in furnishings and clothing.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac-Melbourne Institute survey, consumer sentiment declined by 1.7% from 94.5 in December 2025 to 92.9 in January 2026, pushing confidence further into pessimistic territory following the 9.0% decline recorded in December 2025. While sentiment remains significantly above the extreme lows recorded in 2022-2024 when cost-of-living pressures peaked, the January result highlights growing concern about the near-term economic outlook and household finances. The deterioration reflects a shift in interest rate expectations, with nearly two-thirds of consumers now expecting interest rates to increase over the next 12 months.

The sub-index movements were mixed in January, however all are back in pessimistic territory:

• ‘family finances vs a year ago’ up 2.3% to 82.7;

• ‘family finances next 12mths’ down 4.5% to 97.8;

• ‘economic conditions next 12mths’ down 6.5% to 88.4;

• ‘economic conditions next 5yrs’ up 0.9% to 96.5; and

• ‘time to buy a major household item’ up 0.2% to 99.1.

The January decline was driven by a renewed deterioration in near-term expectations for both family finances and economic conditions, reversing the improvement seen late in 2025. This reflects heightened sensitivity to inflation outcomes and the knock-on to interest rates, with consumers increasingly concerned that borrowing costs will increase in 2026. In contrast, assessments of current family finances improved modestly, suggesting some residual benefit from earlier rate cuts and resilient labour market conditions.

Overall, the January results point to a cautious and cost-conscious consumer. For retailers, this points to a highly selective spending environment, where discretionary demand is likely to remain price and promotion driven.

Source: Australian Bureau of Statistics

The most recent ABS Household Spending Indicator (ABS HSI) recorded a 1.0% increase (seasonally adjusted) in November 2025, representing a 6.3% or $4.6bn increase on November 2024. The modest gain follows stronger growth in October (+1.3%), with November’s increase driven by higher spending on furnishings, and clothing and footwear during the cyber sales period.

Household spending by sub-category was mixed across the month:

• ‘Furnishings and household equipment’ up 2.2%

• ‘Clothing and footwear’ up 2.0%

• ‘Recreation and culture’ up 1.7%

• ‘Hotels, cafes, and restaurants’ up 1.2%

• ‘Transport’ up 1.0%

• ‘Food’ up 0.7%

• ‘Miscellaneous goods and services’ up 0.6%

• ‘Health’ up 0.5%

• ‘Alcoholic beverages and tobacco’ down 1.8%

Growth in November was led by ‘Furnishings and household equipment’ (+2.2%) as households partook in the annual Black Friday sales to maximise value on big ticket items. The ‘Alcoholic beverages and tobacco’ (-1.8%) subcategory recorded the only decline in November, continuing its trend of consistent month-on-month declines over the past two years. This is partially representative of a broader cultural shift among Gen-Z and millennials, but given it only reflects legal purchases of cigarettes and tobacco products, it also shows the impact of illicit tobacco consumption.

Spending on goods and services increased in November 2025, by 0.9% and 1.2%, respectively. On an annual basis, services spending continues to outpace good spending, rising 7.8% between November 2024 and November 2025 compared to 4.9% for goods over the same period. The overall 1.0% rise in the ABS HSI in November 2025 reflected a 1.2% increase in discretionary spending and a 0.7% increase in non-discretionary spending. The increase in discretionary spend are largely caused by the Black Friday sales.