Sentiment remains deeply pessimistic, despite lift in October 2023

Consumer sentiment increased by 2.9% in October 2023 to 82.0, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. This is the first increase in sentiment since July 2023 when the RBA first announced a pause in interest rate rises and came on the back of the fourth month of “pause” in interest rate increases. An increase was recorded in the most recent ABS Retail Sales in August 2023 (0.2%). While growth was recorded at a headline level, this continues to primarily be driven by prices increases (rather than volume), suggesting flat or negative underlying growth. This slow-down in spend is attributable to consumers responding to cost-of-living pressures by restraining purchases, particularly in discretionary categories, as pandemic savings have been eroded for most households. Decreased spend was also seen in the August 2023 NAB Online Sales, which recorded a 1.4% decrease. For retailers, high-end product demand remains strong, suggesting that affluent consumers are feeling the pinch less and are still willing to spend, providing an opportunity for certain retailers during this challenging economic period. It is clear that retailers will need to work hard and show “value” to more impacted consumers to encourage spending over the next few months.

Consumer confidence

• vs prior month - 2.9%

• vs pcp - (2.0%)

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment improved by 2.9% to 82.0 in October 2023, its highest level in 6 months, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. Despite the improvement, the index remains in deeply pessimistic territory. Inflation (which increased to 5.2% in August 2023, following a decline to 4.9% in July 2023) and elevated interest rates continue to have a substantial influence on sentiment, and has corresponded with a period of lower per capita spending over 2023. The lift in sentiment in October 2023 was driven by a marked improvement in the ‘time to buy a major household item’ sub-index, which increased by 7.6% to 82.4, yet this index remains near historic lows. Modest improvements were also seen with ‘family finances vs a year ago’ sub-index (+2.7%), however this sub-index remains the weakest of all the measures (63.1). Westpac’s view is that this improvement may be linked to recent increases in the minimum wage, inflation indexation adjustments to welfare payments and improved interest rates on savings for retirees. Similarly, the ‘finances next 12 months’ sub-index has improved 2.6% to 93.9, driven by a large improvement for households with a mortgage (expectations up 20% since June 2023). The improvement in this sub-index suggests consumer expectations that cost-of-living pressures will ease into 2024. Interestingly, a larger proportion of consumers surveyed expect mortgage interest rates to rise over the next year (63% vs 48% in September 2023).

Retail sales

• vs prior month - 0.2%

• vs pcp - 1.5%

• 12 months v pcp - 6.5%

Source: Australian Bureau of Statistics

The ABS Retail Sales data for August 2023 showed a seasonally adjusted growth of 0.2%. August 2023 sales were 1.5% or $0.5 billion higher than August 2022 sales. The modest growth was driven by improvements in the ‘clothing, footwear, and personal accessory retailing’ (+1.3%), ‘cafes, restaurants, and takeaway foods stores’ (+0.7%) and ‘other retailing’ (+0.7%) sub-categories. The warmer weather experienced in August likely benefitted clothing and apparel retailers, with consumers appearing to have pulled forward seasonal purchases. The increase hospitality-related spend was driven by the continued momentum behind (and viewership of) the FIFA Women’s World Cup. ‘Food retailing’ fell by 0.3%, following a trend of slowing food inflation, especially for fruit and vegetables in August 2023 (fruit and vegetable CPI down 3.4% and 11.7% month-on-month, respectively). Overall, food inflation remains elevated (+4.4% in August 2023 v August 2022) demonstrating how “real” the cost-of-living impact is on consumers.

Online retail sales

• vs prior month - (1.4%)

• vs pcp - 7.5%

Source: NAB Online Retail Sales Index

While online retail sales growth declined for the third consecutive month in August 2023 (-1.4%, seasonally adjusted) sales remain elevated in year-on-year terms (+7.5% vs August 2022). ‘Takeaway food’ (+1.1%), ‘grocery and liquor stores’ (+0.6%) and ‘media’ (+0.1%) recorded growth, while most other categories recorded declines. ‘Homewares and appliances’ (-3.8%) continued to drag on growth (with the twelve month share of the index from ‘homewares and appliances’ having fallen by 20%) and the decline in spend at ‘department stores’ (-2.7%) (compared to the 5.8% growth reported in July 2023) also impacted the result. Online retail sales are estimated to represent 12.8% of retail sales reported by the ABS during the 12 months to August 2023 (totalling $54.02 billion) and are 1.9% lower compared to the 12 months to August 2022.