Rising consumer sentiment at a twenty-month high, as measured by Westpac Consumer Sentiment Index

About The Westpac – Melbourne Institute Survey of Consumer Sentiment Index

The Westpac – Melbourne Institute Survey of Consumer Sentiment Index measures changes in the level of consumer confidence in future economic activity. The usefulness of the survey results is that they are a reliable leading indicator of future household consumer demand which in turn provides a guide for future sales trends for businesses supplying consumer discretionary goods and services. The survey is compiled from about 1200 participants and includes a question whether they consider conditions are favourable for the purchase of major household items in the next 12 months. The Index is standardised so that its average since 1980 is equal to 100. This means that an indicator above 100 signals a boost in consumer confidence and so households are inclined to spend, while below 100 portends an inclination for households to save rather than spend. The two main consumer sentiment surveys in Australia are the ANZ – Roy Morgan and the Westpac and Melbourne Institute survey.

Consumer Sentiment in biggest monthly gain since April 2023

The Westpac – Melbourne Institute Survey of Consumer Sentiment Index has recorded its biggest monthly gain since April last year, taking the Index to its highest level since June 2022. Standing at 86, a twenty-month high, household consumer sentiment remained pessimistic in February, however it is trending higher. The all-time low for the Westpac Consumer Sentiment Index is 76.

The most recent trend is positive for consumer discretionary retailers like Adairs, JB Hi Fi, Super Retail and City Chic. This is especially the case when looking at the ‘time to buy a major household item’ sub-index which surged 11.3 percent to 86.8 percent in February. This sub-index remains well below its historical average of 124.7, but over the past two years, this sub-index has had six of the weakest monthly reads on record. The February gain is an indication that cost-of-living pressures are finally beginning to ease.

What’s next?

The Reserve Bank Board next meeting on March 18-19 will be pivotal to changes in the strength of consumer sentiment. Market consensus is that the RBA Board will leave the official cash rate on hold, provided inflation continues to track in line with market expectations. The key issue is RBA ‘messaging’ and if the RBA Governor implies that inflation is trending down and the scope for rate cuts is gradually emerging, consumer sentiment should bounce higher, supporting consumer demand for household goods.

Implications for the Discretionary Retail Sector

Most discretionary retailers in the December half-year reported a subdued consumer environment, broadly steady gross margins supported by lower inbound freight costs, inventory optimisation as supply chain constraints eased, a stable Australian dollar and price discipline, although labour costs were higher.

Any further strengthening in consumer sentiment post the RBA interest rate decision on March 19 should be mildly positive for ASX-listed discretionary retailers. Retailers which will benefit the most are those with a strong balance sheet that enables dividends to be maintained during periods of slower demand and those with brand power, cost discipline, and store rollout capability. Online sales penetration is also a valuable operational capability, especially if supported by customer loyalty programs and data analytics to leverage customer insights.

Retailers that have all or a mix of these attributes are likely to outperform those without them over the medium-term, including Adairs, JB Hi Fi, Super Retail and City Chic.