Consumer caution to plague retail until mid-year ‘turning point’
Wage growth and disinflation aided by cuts to tax and interest rates are likely to put an end to consumer caution in the latter half of the year, Deloitte says.
After four straight quarters of negative retail spending growth, Deloitte predicts consumers will be tight-pocketed only until a mid-year economic turnaround.
“Real wage growth and disinflation are expected to continue, the updated stage three tax cuts will loosen purse strings, and interest rate cuts are likely,” across the latter half of the year and increasing into 2025, said Deloitte Access economics partner David Rumbens.
Deloitte’s latest Retail Forecast predicted real retail turnover increases of 0.9 per cent and 2.2 per cent in 2024 and 2025, respectively.
Despite the anticipated rebound, sales volumes across the retail sector are expected to grow by only 0.9 per cent across the calendar year, making it unlikely that the sector will climb back to its 2022 levels.
With deflated spending quarter-after-quarter, last calendar year was a “year to forget for retailers,” said Deloitte. For the first time since the series began, real retail spending went backwards over last calendar year, falling by 0.9 per cent.
Paul Zahra, chief executive of the Australian Retailers Association said last year’s conditions were harsher than those experienced during the GFC.
The minor recovery made in the December quarter – seeing a 0.3 per cent increase in retail turnover – was largely the result of aggressive discounting, said Deloitte.
Retailers were forced to chip away at their margins to stay competitive, particularly around Christmas and Black Friday.
Across the December quarter, household goods rebounded after two years of spending contractions while other discretionary spending categories largely floundered. Cafes, restaurants, and takeaway recorded a 2.1 per cent decrease in revenue over the quarter, while apparel took a 1.6 per cent hit.
This year started in much the same way. According to Deloitte, January marked the most pessimistic start to a year in terms of consumer sentiment since the recession of the early 1990s. Over the year to January 2024, the retail sector grew only 1.1 per cent in nominal terms.
“Households are still feeling the brunt of higher interest rates and elevated, albeit moderating, inflation. The January retail sales data released last week points to consumer caution” said Rumbens.
“Recovery has not really kicked into gear yet,” he added, and nor is it likely to until the second-half of the year which he predicts will be a “turning point for the Australian economy.”
That said, the more optimistic forecast for the latter half of the year was qualified by a warning that certain risks might plague the economy.
Specifically, Deloitte pointed to supply chain disruptions due to geopolitical uncertainties, potential delays to interest rate cuts, and spending slowdowns from potential workforce rightsizing.
“Cracks are starting to show in the labour market, with reduced demand for labour and jobseekers finding the job search more difficult,” it said.
Unemployment increased to 4.1 per cent in January, potentially signaling the end of an historically strong labour market. While this might slow economic growth, it might help to curb inflation meaning potential cuts to the cash rate.
While stronger economic performance is generally predictive of consumer spending, perception counts. According to Westpac’s consumer sentiment data, consumers are far from confident.
Since the index began in 1970, consumer sentiment is in the bottom seven per cent of recorded levels. While February has seen an uptick, sentiment is still well below average.
Even if the economic outlook is less bleak, consumer sentiment will have to recognise the change before the retail sector can reap the benefits.
“What is happening in the economy and how people feel aren’t always synchronized. So even improvements in the economy may not result in improved sentiment, or sometimes the impact is short-lived,” said Deloitte.
