Surprise interest rate rise continues pessimistic trend

22 June 2023

Consumer sentiment increased by 0.2% in June 2023 to 79.2, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The survey was undertaken during the week the RBA raised interest rates by an additional 0.25% to 4.1%. The move surprised many economists and consumers who had anticipated that the RBA would hold off following soft economic data over the last month. As we’ve seen in previous months, the responses within the survey week show a big difference between pre-and post-rate announcement. Those surveyed before the RBA’s interest rate announcement recorded significantly higher sentiment reads (89.0) compared to those surveyed after (72.6). Many economists expect that with labour productivity growth slowing and wages rising (increase of 5.75%), further rate rises can be expected in coming months. Consumers seem to agree, with 78% of those surveyed expecting another rate rise over the next year and 48% expecting a rise of 1ppt or more. The most recent ABS retail sales were flat (0.0%), as consumers spent more on winter clothes but cut back on food and dining out in response to increasing cost-of-living pressures. The NAB Online Retail Sales Index also recorded flat growth for online sales in April 2023.

Based on high frequency data indicators, we expect sales in May to be under pressure (when reported) as cost-of-living pressures continue and consumers look for value and hold off purchases until the upcoming mid-year and EOFY sales. According to ANZ-Roy Morgan research, it is expected that Australian consumers will spend $9.3 billion on mid-year EOFY sales (+$500 million v 2022). While it is expected that consumers will spend more per person than last year, around 400,000 fewer Australians will participate. Online sales will also benefit from these sales events, with over half of Australians expected to shop online. Consumers who are less significantly affected by interest rate rises will continue to spend – for example, the ANZ-Roy Morgan research suggests that the 50–64-year-old demographic will likely make up 37.6% or $3.5 billion of spend during the EOFY sales. While sentiment remains glum and retail sales growth plateaus, there is still a willingness to spend, particularly on purchases consumers consider to be ‘value for money’ during sales periods.

Consumer confidence

  • vs prior month - 0.2%

  • vs pcp - (8.3%)

InRetail Consumer Confidence graph

Source: Westpac – Melbourne Institute Consumer Sentiment Index

The Index has remained at deeply pessimistic levels for the past year, comparable to those seen during the deep recession in the late 1980s/early 1990s, driven by inflationary pressures on household budgets. While consumer sentiment recorded a slight 0.2% increase to 79.2 in June 2023, according to the Westpac-Melbourne Institute Index of Consumer Sentiment, the index movement after the rate rise announcement shows there is a risk sentiment may get lower still. The news items that resonated most with those surveyed related to inflation (62%), budget and taxation (43%) and economic conditions (40%), with news on inflation considered as by far the most negative issue. The ‘family finances vs a year ago’ subindex recorded a 3.7% increase, driven by improvements in responses from consumers on lower incomes following the increase to minimum wages by 5.75%. Despite this month’s improvement, the subindex remains in deeply pessimistic territory (65.4). The ‘economic outlook, next 5 years’ subindex also recorded a gain in June (+6.3%), however this follows the steep 9.2% fall in May. All other sub-indexes recorded declines as consumers brace for a further deterioration in conditions and attitudes towards major purchases sour. Confidence around jobs has also begun to fade from recent highs, with the Westpac-Melbourne Institute Unemployment Expectations Index increasing by 6.6% in June to 131.3 (meaning more consumers expect unemployment to rise), driven by the education and hospitality sectors.

Retail sales

  • vs prior month - 0.0%

  • vs pcp - 4.2%

  • 12 months v pcp - 10.4%

InRetail Retail sales graph

Source: Australian Bureau of Statistics

The most recent ABS Retail Sales were flat (0.0%) in April 2023 (seasonally adjusted), following the 0.4% increase in March 2023. April 2023 retail sales were $1.4 billion higher than April 2022 sales (+4.2% vs April 2022, +14.1% vs April 2021, +42.2% vs April 2020). Retail spending was generally soft in April 2023 and the only categories to record growth were ‘clothing, footwear and personal accessories’ (+1.9%), and ‘department stores’ (+1.5%), which were likely boosted by increased purchasing of winter items due to cooler weather and the change of seasons. ‘Household goods’ experienced the largest fall (-1.0%), declining for the third consecutive month, driven by cost-of-living pressures. With EOFY sales nearing, many consumers may also be holding out for these sales events to purchase larger household items. Food related spending recorded a modest decline in April, following a strong period of growth which was largely driven by food inflation. ‘Cafes, restaurants, and takeaway food services’ decreased by 0.2%, while ‘food retailing’ declined by 0.1%, (the first decline recorded in this category in over a year).

Online retail sales

  • vs prior month - 0.0%

  • vs pcp - (1.0%)

InRetail NAB Online Retail Sales Index graph

Source: NAB Online Retail Sales Index

The most recent NAB Online Retail Sales Index recorded no growth (seasonally adjusted) in April 2023, following March’s mild contraction (-0.1%, revised). Strong growth was recorded in the ‘grocery and liquor’ category (+2.9%), which may be due to the out-of-home economy running out of steam, with consumers instead opting for home cooking given increasing cost-of-living pressures. Growth was also recorded in the ‘media’ (+3.8%) and ‘personal and recreational’ (+2.9%) categories, however this was offset by a retraction in other categories, including ‘fashion’ (-2.5%), ‘homewares and appliances’ (-1.2%), and ‘department stores’ (-0.8%). Overall, online sales contracted slightly compared to the prior comparative period (-1% v April 2022). Growth in ACT (+2.8%), Western Australia (+2.8%) and New South Wales (+1.4%) countered the retraction in Tasmania (-6.4%), Northern Territory (-3.5%), Queensland (-1.3%), Victoria (-0.8%) and South Australia (-0.2%). Increasing growth was recorded for international retailers, but this was offset by the mild contraction in domestic retailers. Online retail sales in the 12 months to April 2023 totalled $53.2 billion and are estimated to represent approximately 12.7% of total retail sales (-4.6% v the 12 months to April 2022).