What you need to know:

• Ernst & Young Oceania chief economist, Cherelle Murphy, told attendees at last week’s ADIA Leaders Forum that a chunk of Australian consumers remain “fragile” in the early half of 2024 due to the dozen-plus rate rises and exponential rises in the cost of household goods.
• That’s those with a mortgage at least – the economist has noted one third of the population are “going to the races” and continue to spend without the worry of mortgages.
• But the second half of the year is set to shift thanks to the tax cuts coming in, real wages rising again to just overtake inflation and a hint of potential rate cuts. All these will give consumers a little more confidence that things are looking up, even if they’re not significantly better off, says Murphy.
• Retailers are already telling this story, she continues, with the ASX50 consumer discretionary index suggesting they’re already calculating that the worst is behind us.
• But even while agreeing it’s a year of two halves, the latest Deloitte Access Economic Retail Forecasts report is warning retailers the tough times aren’t over just yet, noting an over-reliance on discounting.
• Roy Morgan’s latest Consumer Confidence numbers also show a consumer “going sideways” in H1 but its economists agree things should improve in H2.

Only get better?

This year is shaping up to be a tale of two halves for consumer sentiment and retail spending according to a trio of industry commentators on the economy. Yet one economist says retailers are already adding their own more positive narrative spin into the mix – even as they continue to rely on discounting to spur growth.

Speaking at last week’s ADIA Leaders Forum in Sydney, Ernst & Young Oceania chief economist, Cherelle Murphy (pictured), described the Australian consumer as “fragile” in the early months of 2024. That’s especially true for younger mortgage holders battered by a dozen or so rate rises, along with the soaring cost of household goods.

“We continue to see consumer sentiment at quite low levels and it’s worse for mortgagees. There was a little improvement toward the end of the year and I think it’s probably reflecting the speculation that interest rate rises are probably finished. It’s not exactly good news, but at least there are not going to be more rate rises,” Murphy told attendees.

Australian Bureau of Statistics data certainly indicates a tale of two consumers – or more accurately, people with whopper mortgages and rent bills, purchasing one set of household items, versus those who own their own home outright or have retired purchasing a different set of products and services.

“Working households are the ones suffering the most from cost-of-living problems – their cost of living is growing at 6.9 per cent per year, not the 4.1 per cent the CPI might be suggesting [December 2023 quarter]. That’s because they have to buy more things, they’re paying childcare fees and have big grocery bills,” Murphy said.

“But the older age groups and self-funded retirees are not experiencing the same cost-of-living problems because they’re buying different stuff. We do have this gap opening up between those who are struggling versus those who are buying. Also with the older age groups, if they haven’t already paid off a home, they have a smaller mortgage. We are seeing that divide.”

Yet according to Murphy, an interesting and more positive retail response is peeking its head through.

“When you go to the markets, they tell us a different story. The ASX50 consumer discretionary index including retailers such as JB Hi-Fi and Harvey Norman, indicates the market is getting pretty excited and that they think the worst is behind us for consumers,” she said. “Of course it could fall back again tomorrow. But over this year so far, it’s been looking up and it’s growing more quickly than the market overall. There’s something in this.”

Tax trick

In Murphy’s view, it’s a sign that much of the bad news is in the past. “It doesn’t mean people will feel automatically better but at least they know things are potentially not going to get worse,” she said.

The updated Stage 3 tax cuts coming in from July are a big part of this, which the Labor government has stated will see 13.6 million of us better off. “The redesign of the tax cuts in late January means a larger percentage of the population is getting a bigger tax cut than they thought they would get. That does help a bit – but only a little bit,” she said.  

“One thing I wanted to point out is taxes as a share of household incomes have been growing enormously. That’s due to bracket creep – wages going up, which are nominal and not adjusted for inflation – plus the fact people are working more hours, and more people are working. It has meant more people are paying bigger sums of tax.

“It’s running at about 14 per cent of household income, which means it’s been a bigger cost on the household budget than interest rate rises. It’s been incredibly taxing, and yet we’re all grumpy at the Reserve Bank. We should be grumpy at the Government for zapping our incomes more. Tax cuts don’t give back all that much and we’re not really ahead, but most people will feel like they’re a bit better off.”

2% target

All things points to conflicting headwinds for consumers, Murphy said. Housing is really tough, the jobs market will get looser and it could be harder for people to find work as the year goes on, although this shift is expected to be pretty minor according to Murphy.

“On the more positive side of the equation, you have the tax cuts coming in, real wages will rise again because people’s wages now are just overtaking inflation,” she said. 

“And for the one-third of households who own their homes outright, they’re off to the races.

Everything is going better for them. It means they’re not having to pull back, there’s a bit of a tax cut coming and superannuation tax concessions too. That third shouldn’t be forgotten because they are spending. They’re having a good time right now and they are not worried.”

In Murphy’s book, this makes for a clear distinction between the first and second halves of this year. First half growth remains soft, “because consumers will continue to not do that much besides pay bills, buy groceries, not taking as many holidays as seen recently”, she said.

“As we get into the second half, with business investment holding up, exports pretty okay, and ongoing public sector spending, then we add on slight improvements to households through tax cuts and real wages going up and some wealth gain for some, and I do think we will see consumers just start to recover a bit by end of the year,” Murphy said. “What will help of course is if we do get a rate cut – 1 or 2 are in current forecasts, I’m not saying they will be delivered, but if they are that would be a pick-up in sentiment.

“If we get growth more than 2 per cent this year we’ll be doing well. But I do think 2025 starts to look better.”

Greater expectations

Such delineation between first half and second half was echoed by Deloitte Access Economics this week in its latest Retail Forecasts edition. The report stated four consecutive quarters of negative growth are now coming to a close, but warned leading retailers of a year of sentiment switching thanks to projected consumer spending patterns and ongoing cost-of-living concerns.

According to partner and principal report author, David Rumbens, 2023 was the worst year for retail sales growth in a generation and discounting was rife in the quest to get consumers through the shop doors. ABS data shows retail profits up 1.4 per cent over the last year, which he said was a fall in real terms, with profits down 10.9 per cent in the December quarter despite the boost Black Friday and Cyber Monday sales made in November.

Noted in Deloitte’s report is NAB consumer sentiment data also showing one in two consumers cut back on eating out and buying micro treats, such as a coffee or snacks. In addition, 38 per cent reduced spending on food delivery services and 35 per cent cut back on streaming services.

Deloitte is predicting consumer caution to extend through into June, with retailers continuing to discount to get sales. As a case in point, the consulting group noted January retail sales only growing 1.1 per cent in nominal terms in the year to January 2024.

Yet the second half is looking much brighter and a “turning point for the Australian economy”, Rumben said, thanks to real wage growth and disinflation continuing, as well as the updated three tax cuts, which “will loosen purse strings, and interest rate cuts are likely”.

Deloitte’s report said 2025 is expected to build on the strength of the second half. Real retail turnover is pitched to increase by 0.9 per cent and 2.2 per cent in 2024 and 2025, respectively.

“Better is to come for retailers, but they need to hang in there,” the Deloitte report stated. “Much of 2023 for retailers has been characterised by discounting. Generally, categories that discounted substantially reaped the benefits of increases in sales volumes. As discussed in previous discussions of Retail Forecasts, this strategy cannot go on forever.

“A key message to retailers is mitigate the risk of cutting too hard by taking into consideration the economic climate of today, but planning for a more prosperous future tomorrow. Cutting costs too much to get through a subdued market could mean missing the opportunity to expand sales as broader economic conditions improve through the course of 2024.”

Confidence gradient

As a third data point of note, Roy Morgan’s latest consumer confidence results on 12 March showed a 1.2-point gain to 82.2 this past week, meaning consumer confidence is up 5.2 points compared to one year ago. Yet it’s still 1 point below the weekly 2024 average of 83.2.

“ANZ-Roy Morgan Australian Consumer Confidence rose slightly over the week but is still broadly trending sideways,” commented ANZ senior economist, Adelaide Timbrell. “Confidence in future finances, which measure how many participants believe their own finances will be better in a year from now, was at its highest level since January 2023. It also hit above its neutral 100 level, meaning more optimistic participants than pessimistic ones. Inflation expectations have settled lower this year, signalling confidence in the battle against inflation.

“We expect GDP to be soft for the first half of the year before tax cuts, other fiscal stimulus and falling inflation help household incomes and spending.”­­­­