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‘Deeply pessimistic’: Retailers warned as consumers tighten their belts
In a worrying sign for retailers, consumer sentiment has dropped to a near-record low as households examine their budgets.
- The Westpac-Melbourne Institute Consumer Sentiment Index has dropped to 78.2, the lowest reading since 2022.
- The low consumer sentiment is a red flag for retailers, who are relying on upcoming Black Friday and Christmas sales to recoup losses from high fuel prices and low retail spending.
- Typically, any reading below 100 on a consumer sentiment index represents a cut-back in discretionary spending.
Australian retailers have been warned that consumers are currently “deeply pessimistic” about the economy and cutting back on discretionary spending.
The Westpac-Melbourne Institute Consumer Sentiment Index, released today, came in at 78.2, the lowest reading since late 2022, when annual inflation was running at close to 8 per cent.
Typically, any reading below 100 on a consumer sentiment index represents a cut-back in discretionary spending as shoppers tighten their budgets around core expenses.
Matthew Hassan, head of Australian macro-forecasting at Westpac, said the index was reporting a mood only seen in grim economic times.
“Readings this weak had only ever been seen in the economy’s darkest moments: at the onset of the COVID pandemic; the height of the GFC; and during the recessions in the early 1990s and early 1980s,” Hassan said.
“Cost-of-living concerns remain front and centre.
“The last month has seen petrol prices push towards $2.40/litre, official inflation measures hit 4.3 per cent, and the RBA raise the cash rate by another 25bps to 4.85 per cent, an 18-year high.
On housing, the index showed that many believed more price falls were still to come.
“Consumers are no longer positive about the house price outlook. The Westpac–Melbourne Institute Index of House Price Expectations recorded a steep 13.4 per cent drop to 99.6 in November,” Hassan wrote.
“This is the second biggest monthly deterioration since the COVID period and the first net negative (sub-100) read since November 2022.
“Consumers are evenly split on the outlook, just over 38 per cent expecting more declines, 19 per cent expecting no change and 38 per cent expecting a rise (5 per cent reported ‘don’t know’).”
How does a consumer sentiment index work and what does it mean?
A consumer sentiment index is a statistical measure of the “mood” of a population within an economy.
Consumer sentiment indexes are typically done by surveying a portion of the population.
This particular Westpac-MI index was based on 1200 adults aged 18 and over, and weighted to reflect Australia’s population distribution.
So why do economists care about mood?
In extremely simple terms, when consumers are optimistic, they spend more, and the economy grows.
When they are pessimistic, they tighten budgets and focus on core expenses: Typically housing, food, childcare, and fuel.
Hassan said the record-low consumer sentiment came at a time when many businesses relied on an uptick in discretionary spending.
“The negative mood is a troubling sign for retailers heading into the Christmas high season,” he said.
“Not surprisingly, consumers with a mortgage are more focused on reigning in spending, with 92 per cent of this subgroup planning to spend the same or less than last year.”