Sentiment pessimistic despite rate pause as consumers brace for further rate rises

Consumer sentiment decreased by 0.4% in August 2023 to 81.0, according to the Westpac-Melbourne Institute Index of Consumer Sentiment, despite rates being held for a second consecutive month and suggestions from some in the market that rates may have now peaked. The boost in retail spending in May, attributable to Mother’s Day and strong promotional activity leading up to end of financial year sales events, appears to have been temporary, with consumers pulling back on spending in June. The most recent ABS Retail Sales and NAB Online Sales both recorded declines in June 2023 (0.8% and -4.1%, respectively).

“Strategic” and “value” shopping remains a key theme as cost-of-living pressures continue, with consumers being more selective with how they spend their money and taking advantage of sales events to maximise return on spend. Surveys by Australia Post and PayPal indicate consumers plan to spend less in the lead-up to Christmas and will take advantage of discounting and promotions to stretch their spending power. The Australian Retailers Association has noted that Father’s Day will deliver a spending boost, however consumers are predicted to spend 1.3% less than 2022. In response to consumers cutting back on spend, there are reports of retailers cancelling and/or scaling back orders for the Christmas period. The NAB forward orders data index has remained in deeply negative territory for the past two months (-18 in May, -31 in June). According to NAB, it’s the worst decline in retail forward orders outside of the pandemic and indicates many retailers expect demand to fall over the next few quarters as cost-of-living pressures escalate. Understanding consumer behaviour and forecasting sale and corresponding inventory requirements heading into the Christmas period will be a key success factor for retailers during the coming months, particularly given some are still struggling with legacy inventory challenges.

Consumer confidence

• vs prior month - (0.4%)

• vs pcp - (0.3%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment decreased by 0.4% to 81.0 in August 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 to keep the cash rate unchanged for a second consecutive month, which offered little comfort to consumers who appear to be unconvinced that the tightening cycle has ended. Responses from those surveyed after the RBA’s decision were 4.9% lower than those surveyed earlier in the week, likely due to consumer expectations of further rate rises in the coming months (two thirds of those surveyed expect rates to increase in the next year). Consumer sensitivity to further rate rises is compounded by ongoing cost-of-living pressures, particularly due to recent rises in fuel and energy costs. There are clear differences between demographic groups. When looking at age categories, 18 to 24 year olds (a sub-group that is highly sensitive to petrol prices but less affected by interest rates) recorded a 12.8% decline in sentiment, while other age-groups recorded a 0.9% increase on a combined basis. Three of the five sentiment sub-indices recorded increases in August 2023, with the largest increase seen in the ‘family finances vs a year ago’ sub-index (+3.4%). This reversed much of the 4.9% decrease in July 2023, yet remains at an extremely pessimistic level overall. The largest decrease was recorded in the ‘economic conditions next 12 months’ index, which declined by 4.0% and partially reversed the 5.4% uplift in July 2023. The Westpac-Melbourne Institute Unemployment Expectations Index decreased 3.1% to 127.2, indicating that more consumers expect unemployment to fall in the year ahead. Despite an improved labour market outlook overall, there was a notably sharp rise in unemployment expectations amongst those employed in the construction sector, where high-profile business collapses and ongoing pressures have spiked job-loss fears. We foresee some improvement in sentiment if the RBA stays on pause in September, however a move from overall pessimism to optimism is unlikely this year.

Retail sales

• vs prior month - (0.8%)

• vs pcp - 2.3%

• 12 months v pcp - 9.0%

Source: Australian Bureau of Statistics

The most recent ABS Retail Sales decreased by 0.8% (seasonally adjusted) in June 2023, completely reversing the revised 0.8% gain in May 2023 (previously 0.7%, seasonally adjusted). June 2023 retail sales were $0.8 billion higher than June 2022 sales (+2.3% vs June 2022, +15.2% vs June 2021, +18.6% vs June 2020). Most retail industries declined in June 2023, with the largest declines recorded in ‘department stores’ (-5.0%), ‘clothing, footwear and personal accessory retailing’ (-2.2%) and other retailing (-2.2%). ‘Household goods retailing’ (-0.1%) also decreased, with the turnover for this industry declining eight times over the past twelve months. Food-related spending was mixed, with ‘cafes, restaurants, and takeaway services’ declining (-0.3%), while ‘food retailing’ increased (+0.1%) (driven by price increases). In year-on-year terms, retail sales increased 2.3% in June 2023, driven by ‘food’ (+5.8%) and ‘cafes, restaurants, and takeaway services’ (+8.6%). Sales growth for essentials like food (which make up over a third of retail spending) has been bolstered by price increases (rather than volume), which has masked an overall decline in retail spending. According to the Australian Retailers Association, “we’re very much in the grip of a discretionary spending slowdown… we’re now seeing the lag effect on cost-of-living pressures come to fruition”.

Online retail sales

• vs prior month - (4.1%)

• vs pcp - 0.1%

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales Index plummeted by 4.1% (seasonally adjusted) in June 2023, reversing the strong growth of 3.7% recorded in May 2023. The decline was driven by a contraction in all categories, particularly in ‘takeaway food’ (-7.5%). NAB’s broader indicator of retail trade recorded growth for takeaway food, suggesting the decline in the online measure may be due to consumers choosing to dine out rather than order home delivery. Other large declines were recorded in ‘personal and recreational goods’ (-5.5%), ‘homewares and appliances’ (-5.0%), and ‘department stores’ (-3.5%), noting these categories experienced strong growth in May 2023 due to pulled forward sales events. Year-on-year growth was recorded for the second consecutive month, albeit minimal in June 2023 (+0.1%). While most discretionary categories recorded strong declines, ‘media’ (-1.2%), ‘fashion’ (-3.2%), and ‘games and toys’ (-2.4%) were less negative relative to other categories, suggesting that not all discretionary items have been affected equally. Online retail sales growth decreased among all states and territories, except for the Northern Territory (+0.1%). The largest sale states recorded the most significant declines, with contractions in growth recorded in NSW (-4.5%), VIC (-4.2%) and QLD (-4.1%). Online retail sales in the 12 months to June 2023 totalled $53.29 billion and are estimated to represent approximately 12.7% of total retail sales (-5.1% vs the 12 months to June 2022).