Consumer sentiment recovery beginning to plateau

According to the Westpac–Melbourne Institute Index of Consumer Sentiment, consumer sentiment edged up by 0.1%, from 92.1 in January 2025 to 92.2 in February 2025. Despite the slight improvement, consumers remain ‘cautiously pessimistic’ as household balance sheets continue to recover from the holiday season, despite anticipation of a near-term interest rate cut.

In recent months, consumer sentiment has been heavily correlated with news around interest rate expectations. A near-term rate cut will likely translate to a prompt rise in sentiment in March, however the impact to discretionary spending is expected to lag at least 3-4 months (and a further rate cut) behind. For retailers, the anticipated 25-basis point reduction is unlikely to ‘move the dial’ from a bottom-line perspective. Accordingly, the focus should continue to be on managing inventory levels and building cash reserves to position themselves to capitalise on increased consumer spending expected to return in the second half of 2025.

The most recent ABS retail sales data showed a 0.1% decline in December 2024, following consecutive months of growth in October (+0.5%) and November (+0.7%). This slight decrease in sales is attributed primarily to the material November sales. We note that December 2024 sales were 4.6% higher than December 2023. The NAB Online Retail Sales experienced a marginal increase of 0.2% in December after a robust 6.0% rise in November. This modest December growth partly reflects the timing of Cyber Monday, one of the largest sales events of the year, which fell in December. Notably, online retail continues to capture an increasingly significant share of sales during the Black Friday to Cyber Monday period.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac–Melbourne Institute Index of Consumer Sentiment, consumer sentiment had a modest increase of 0.1% from 92.1 in January 2025 to 92.2 in February 2025. While this slight improvement signals a more positive outlook, overall sentiment remains subdued due to ongoing high cost-of-living pressures.

The sub-indexes saw mixed results this month as key movements included:

• ‘family finances vs a year ago’ (-3.4%) to 75.1.

• ‘family finances, next 12 months’ (+0.6%) to 105.0;

• ‘economic conditions next 12mths’ (+1.6%) to 92.6;

• ‘economic conditions next 5yrs’ (+0.9%) to 97.5; and

• ‘time to buy a major household item (+0.1%) to 90.9.

The five-consumer sentiment sub-indexes are made up of three forward-looking and two current indices. The index that looks at conditions versus a year ago, shows that consumers are still ‘feeling the pinch’ of cost-of-living pressures and the time to buy a major household item shows consumers are cautious. The forward-looking indices are far more optimistic. This combination of results suggests that while consumers remain wary of the immediate challenges of managing household finances amid affordability pressures, they are gradually becoming less concerned around their long-term financial outlook.

Retailers should look to clear remaining end-of-season stock and manage cash over the next few months while consumers begin to rebuild household balance sheets. A near-term rate cut will likely have an immediate positive impact on consumer sentiment, however the flow on effects to discretionary spending will likely only be seen in the second half of 2025. This will provide a welcome opportunity for retailers to capture a larger share of consumer’s disposable cash via targeted promotional and sales events towards the EOFY sales beginning in June 2025.

Source: Australian Bureau of Statistics

The most recent ABS Retail Sales data recorded a slight decrease of 0.1% (seasonally adjusted) in December 2024, while on year-on-year terms sales increased 4.6% or $1.6 billion compared to December 2023. With consecutive months of growth of 0.5% in October 2024 and 0.7% in November 2024, retail spending ended the year relatively strongly. Sales events in November 2024 continue to pull-forward Christmas spending, impacting December results. 

On a sub-category basis, December 2024 saw a shift in consumer spending towards larger ticket items such as electronics and furniture (‘household goods retailing +1.6%).  This was due to Cyber Monday occurring in early December, leading to an increase in spending at the start of the month.  

However, the sub-categories saw mixed results overall.  The largest declines were driven by:

• ‘clothing, footwear and personal accessory retailing’ (-1.8%);

• ‘other retailing’ (-1.4%); and

• ‘cafes, restaurants, and takeaway food services’ (-0.5%).

Retail sales volumes increased by 1.0% (seasonally adjusted) in the December 2024 quarter. For retailers, this trend highlights the importance of promotional and sales activities in stimulating discretionary spending, despite potential margin pressure.

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales in December 2024 showed a modest increase of 0.2% (seasonally adjusted), following a sharp increase of 6.0% in November 2024.  Growth spiked in year-on-year terms, with seasonally adjusted sales increasing 18.0% between December 2023 and December 2024.  

The increase in November was attributable to Black Friday and the lead up to Cyber Monday which actually fell in December. The proportion of online sales during the largest end-of-year sales event, continued to rise in 2024. Online sales accounted for approximately 35% of the total retail trade between Black Friday and Cyber Monday in December 2024, up from around 25% in 2022 and 9% in 2012 according to NAB’s Chief Economist, Alan Oster.

Online retail sales are estimated to total $59.9 billion and represent 13.8% of retail sales reported by the ABS during the 12 months to December 2024.