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Retail Forecasts: the retail recession has arrived

Deloitte Access Economics’ Retail Forecasts notes that real retail turnover in Australia fell again – by 0.6% over the March 2023 quarter – locking in a retail recession after the 0.3% decline in the December quarter of 2022.

This isn’t a surprise. High inflation and rising interest rates have eroded the purchasing power of consumers. Consumer sentiment, in response, is now at historically pessimistic levels.

However, it’s not expected to be a uniform picture across the retail landscape. Over the past six months, food sales in real terms have continued to grow by a healthy 1.7%. Non‑food retail on the other hand has been in the dog house, with sales volumes falling by 3.7%.

We’re also seeing consumer bases react differently to the economic environment. Younger people have been disproportionately impacted by the higher cost of living, particularly via rents, and are curbing spending more than older Australians.

Yesterday’s National Account data on Q1 2023 confirmed the sombre consumer environment. Real consumer spending growth over the quarter was just 0.2%, with consumers prioritising spending on groceries and essential services. The modest growth in broader spending was led by a drop in the household saving ratio which decreased from 4.4% in Q4 2022 to 3.7% in Q1 2023 – the lowest level since June 2008.

Tuesday’s 25 basis point increase, which raised the official cash rate to 4.1%, will further squeeze spending. According to ANZ’s Housing Affordability report, the proportion of income required to service a new mortgage increased to 42.7% in March 2023, up from 34.4% in March 2022.

There are, however, still some silver linings for consumers, with retail price growth starting to ease. Headline inflation over the March quarter was 1.4% while trimmed mean CPI was 1.2%, both much higher than the 0.6% retail price growth. In part, the more modest retail price growth comes down to discounting, which is particularly apparent in apparel and department stores.

There’s also some good news for retailers, with expectations of future migration being upgraded to 400,000 in 2022-23 and an expected 315,000 in 2023-24. The further return of migrants, and especially students coming back for Semester 2, could be the boost needed to get retail sales back to overall growth later in 2023.

Spurred by more people and more open wallets, total real retail turnover is expected to rise from -0.7% across calendar year 2023 to 1.3% in calendar 2024. As inflation continues to track down, there is expected to be a point in 2024 where real wage growth becomes positive again.

This would not be a boom – indeed, it’s still below the expected rate of population growth. But it is better than the recent picture of going backwards, and the anticipation of sales growing once again may allow consumer and retailer sentiment to start improving towards the end of 2023.

Chart 1: National real retail year-to growth

Source: ABS, Deloitte Access Economics.

Download the executive summary of Retail Forecasts here.

This blog was co-authored by Shannon Cutter, Manager at Deloitte Access Economics.