Sentiment further declines despite rate pause

Consumer sentiment declined by 1.5% in September 2023 to 79.7, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. Sentiment has remained at deeply pessimistic levels for over 12 months, comparable to the sustained period of weakness in the early 1990s recession. Ongoing pressure on family finances continues to weigh on confidence, as consumers feel the cumulative effect of the interest rate tightening cycle and a sustained period of inflation, impacting the cost of living. The ABS Retail Sales recorded a 0.5% increase in July 2023, while NAB Online Sales recorded a modest 0.2% decline in July 2023. Despite different overall results, both ABS Retail Sales and NAB Online Sales results were impacted by a strong lift in department stores in July 2023 (3.6% and 5.8%, respectively). This was driven by increased volume at lower average transaction values, reflecting consumers trading down and increased discounting by retailers.

With multiple headwinds and limited obvious drivers of retail sales growth in the immediate to medium term, compounded by ongoing cost drivers putting pressure on retail margins, the ability to maintain or grow market share through competitive positioning remains critical for retailers, particularly in the lead up to established sales events season and Christmas. In circumstances where consumers are increasingly looking for “deals” as a proxy for “value”, retailers will need to carefully balance the trade-off between maintaining margin or discounting to maintain sales levels, having regard to their individual circumstances, such as cash flow and inventory position.

Consumer confidence

• vs prior month - (1.5%)

• vs pcp - (5.6%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment decreased by 1.5% to 79.7 in September 2023, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was undertaken in the week during the announcement of the RBA’s decision in July to keep the cash rate unchanged for a third consecutive month and the week following the publication of the July 2023 CPI inflation result of 4.9%. Weak consumer sentiment remains impacted by pressures on family finances due to rising cost of living and inflation. Elevated prices for non-discretionary items (including utilities, rent and groceries) show no sign of subsiding in the near term, which have been compounded by a 15% increase in petrol prices over the last two months. The promise that the interest rate tightening cycle may have peaked or be close to peaking (48% of consumers expect rates to rise over the next year, down from 68% in August 2023), has done little to boost sentiment, as consumers continue to feel the cumulative effects of rate hikes earlier in the year. The ‘family finances vs a year ago’ sub-index fell 4.4% to 61.5 (a 31-year low), driven by large declines amongst renters, 18–34-year-olds and low income earners. Two additional sub-indexes recorded a decline in September 2023, with the ‘time to buy a major household item’ decreasing 3% to 76.6 and the ‘economic conditions, next 5 years’ declining by 3.2% to 90.5.

Retail sales

• vs prior month - 0.5%

• vs pcp - 2.1%

• 12 months v pcp - (0.9%)

Source: Australian Bureau of Statistics

The July ABS Retail Sales increased by 0.5% (seasonally adjusted). July 2023 retail sales were 2.1% ($0.7 billion) higher than July 2022. Most retail industries recorded small increases in July 2023, with the largest increase recorded in ‘department stores’ (+3.6%), ‘clothing, footwear and personal accessory retailing’ (+2.0%) and ‘cafes, restaurants, and takeaway services’ (+1.3%). ‘Household goods retailing’ (-0.2%) reported its eight decline in the past twelve months, being the only core category to have reported a contraction in total sales values over that period. Food-related spending increased at ‘cafes, restaurants, and takeaway services’ (+1.3%), while ‘food retailing’ remained unchanged. The 2023 FIFA Women’s World Cup is likely to have supported spending on eating and drinking. A number of data sources suggest the growth is more as a result of inflation rather than volume driven.

Online retail sales

• vs prior month - (0.2%)

• vs pcp - 6.3%

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales Index decreased by 0.2% (seasonally adjusted) in July 2023, following a 0.4% decline recorded in June 2023 (revised from a 4.1% decline). The decline was driven by a contraction in growth among most categories as consumers rebalance their channel preferences and return to physical stores, with the most significant decline recorded in ‘homewares & appliances’ (-4.2%). Rapid growth was recorded in ‘department stores’ (5.8%) which also reflected in the broader ABS Retail Sales Data, however granular data showed that this improvement was driven by an increase in volume, while average spend per transaction in this category declined. This suggests that consumers are trading down in purchases in this category or there is price discounting by existing retailers/new entrants (or a combination of both). While most discretionary categories recorded declines, ‘games and toys’ (0.5%) and ‘takeaway food’ (0.3%) recorded slight growth. Growth was mixed across states, with Western Australia (2.0%) and Queensland (1.8%) faring better than the other states and territories. Growth in the two largest sale states, Victoria (-0.8%) and New South Wales (-1.2%), contracted again this month. Apart from the May 2023 sales spike, the recent results support the view that there has been a moderation in spending behaviour over the last 6 months and NAB expects this trajectory to continue in the near term. Online retail sales in the 12 months to July 2023 totalled $53.67 billion and are estimated to represent approximately 12.7% of total retail sales (-4.1% vs the 12 months to July 2022). Despite the recent declines in monthly growth, year-on-year growth was reported to be up 6.3% (noting this compared to a period of contraction in 2022).