Lower than expected rate rise tempers consumer pessimism

Consumer sentiment fell by 0.9% to 83.7 in October 2022, hovering at near recent and historic lows, as households continue to grapple with higher costs of living and ongoing rising rates. The most recent ABS retail sales in August 2022 recorded a 0.6% increase, while online sales experienced the sharpest fall in over six months (-3.5%). While sales contain an element of inflation, high savings levels following the pandemic and low unemployment levels have prevented spending from tightening significantly yet. There are however some indicators pointing to slowing growth in spending (particularly in discretionary categories). With consumers becoming increasingly cost conscious, retailers will need a good strategy if the Christmas period is to be successful.

Consumer confidence

• 1 month - (0.9%)

• 12 months - (20.0%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

The Westpac-Melbourne Institute survey of consumer sentiment was conducted during the week the RBA announced the 25bp rate rise and there was a dramatic 14.6% difference between responses from consumers surveyed immediately prior to and after the RBA’s lower than expected rate rise. Concerned with the prospect of a further 0.5% cash rate rise, those surveyed before provided an index reading of 77.4 (8.3% reduction from September) which would have been the second lowest level in the last 30 years. Those surveyed after were significantly less pessimistic with the post-announcement read being 88.7. Based on the blend of responses, consumer sentiment fell by 0.9% to 83.7 in October 2022, partially reversing last month’s surprising improvement of 3.9%. Having fallen 18.1% this calendar year, the index remains firmly in pessimistic territory at a level comparable to lows reached during the pandemic and the extended weakness experienced during the Global Financial Crisis. The end of the fuel excise tax, renewed concerns of serious flooding on the eastern seaboard, further rate rises expected and growing fears of a global recession will continue to exacerbate cost of living burdens, meaning there is no clear driver for a material turnaround in consumer sentiment in the immediate future, other than things being “less bad” than expected.

Retail sales

• 1 month - 0.6%

• 12 months - 19.2%

Source: Australian Bureau of Statistics

Despite the pessimism, retail sales continued their positive momentum in August (the most recent ABS retail sales data) with a 0.6% increase reported. August 2022 sales were $5.62 billion higher than August 2021 sales (+19.2% vs August 2021, +18.4% vs August 2020). While the rate of growth is slowing, it has still not tightened to the degree many have expected as pent-up lockdown demand and strong household saving reserves continue to support consumer spending, noting inflation is also likely playing a role in the increasing sales dollars (with a lower growth in volume). The “household goods retailing” and “department stores” categories were the standouts in August, reporting growth of 2.6% and 2.8%, respectively. Conversely, the “clothing, footwear and personal accessory retailing” category reported a notable decline of 2.3%, indicating there may be some weakness in discretionary spending.

Online retail sales

• 1 month - (3.5%)

• 12 months - (18.9%)

Source: NAB Online Retail Sales Index

As consumer spending patterns partially revert to pre-pandemic behaviour, retail continues to experience a moderation of online sales. Online sales declined for the seventh consecutive month in August 2022 (-3.5%, seasonally adjusted), yet remain up on pre-COVID levels (+75% compared to August 2019). Sales contracted across all categories, led by the largest sales category, homewares and appliances, which fell by 7.2% domestically. Online retail sales are estimated to represent approximately 14% of total retail sales or approximately $54.9 billion in the twelve months to August 2022 and are approximately 9.4% higher than the 12 months to August 2021.