The economy is turning with consumers digging into the corners of their pockets to find the last of their spending power, according to market analysts.
The COVID tailwinds for retail have been exhausted and, as costs rise faster than wages, consumers are pulling back spending, with the second half of 2023 in Australia seen as a tipping point.
Deloitte Access Economics calls it a retail recession. Inflation and rising interest rates have eroded the purchasing power of consumers and, in response, consumer sentiment is at historically pessimistic levels.
Investment bank UBS has downgraded a long list of ASX-listed discretionary retailers, including Harvey Norman and Solomon Lew’s Premier Investments, as its analysts call an end to consumer reserves.
The same confidence-sapping news is behind advertising industry analysts seeing tougher economic conditions dragging at ad spend growth.
The forecasts are weaker for the second half of 2023 than the first six months.
GroupM now sees a flat market for all of 2023 in Australia, growth of just 0.2%, and linear television down 6.1%.
Melissa Hey, GroupM’s chief investment officer, says 2023 is delivering the expected challenge of tougher economic conditions.
“The impact of higher interest rates, rising energy costs and the increased cost of living are contributing to a flat market forecast for the year.
“While the cost-of-living increases may continue to impact consumers in the second half of the year, the marketing lessons from previous downturns remain the same: the brands that maintain a consistent market presence through advertising gain an extra share of voice and consumer trust.”
MAGNA, the IPG Mediabrands intelligence unit, is more optimistic, forecasting Australia’s advertising market to grow by 4% this year, compared to 7% in 2022.
Lucy Formosa Morgan, managing director, MAGNA Australia, says it’s been a slower start to 2023 with challenging global economic conditions and consumers under increasing financial pressure, all of which has made for a jittery market.
“Much as we’re forecasting a number of the traditional channels to contract, particularly Linear TV, there are areas that remain strong, namely Digital (search, video and social) and OOH. Digital naturally is benefitting from consumption habits evolving and the traditional channels growing their digital offerings.”
Dentsu forecasts Australia’s advertising market growing marginally slower at 3.2% in 2023, due to a softening in the economic outlook, and then slipping to 2.4% in 2024 and 2.2% in 2025.
UBS analysts, in a note to clients, say there is now evidence that the strong (for now) labour market and household savings built during COVID are no longer sufficient to offset the rising cost of living pressures, which are now weighing on consumers, with spend now falling for a broader range of retailers.
The bank’s June quarter consumer survey of 1,000 adults confirms a mid-year slowdown, with a slide in the financial outlook of Australian consumers as a larger proportion of the spending pie is taken up by pain categories such as utilities, rent and insurance.
“Middle-income households are now showing clear signs that the transmission of pain from the rate hiking cycle (which began over a year ago) is now hitting hard,” the analysts write.
“With cost of living categories unable to be scaled back (in nominal terms, due to sticky inflation), consumers in 'mortgage belt' Australia are telling us that they expect to sharply reduce their spending on 'fun' categories, such as Entertainment, Recreation, Eating Out, Takeaway Food, and International Travel.
Analysts at Macquarie Bank, who have been warning about a slowing consumer for the past 12 months, say Australian consumer spending appears to be at a tipping point.
“It has taken longer than we initially expected, but the brakes are being firmly pressed at the moment,” the analysts write in a note titled Winter has Come.
“A series of negative trading updates from Australian consumer stocks … in recent weeks point to a significant shift in behaviour over the past two months.
“We believe the impact of fixed rate mortgage resets, rental increases, HECS repayments, and staples inflation has finally caught up with consumers.
“The tailwind of an excess savings rate in calendar 2022 unwinding has supported spending growth until now, but it has now reached a normal level.
“We see significant headwinds building for consumers over the back half of calendar 2023.”
Funds manager Wilsons, in a study, the Australian Economy at a Crossroads, says consumer spending prospects, in the face of high inflation and sharply higher interest rates, would be even weaker if it was not for the substantial savings buffer that households built during the pandemic and the strong starting point for jobs.
“Both these supportive variables are likely to gradually wane over the course of the next 12 months but should cushion the extent of the consumer slowdown,” Wilsons says.
“Recent surveys of consumers’ confidence from Westpac and ANZ suggest sentiment remains at or near levels usually seen during periods of economic downturns such as the global financial crisis, when Australia dodged a ‘technical’ recession.
“However, this sentiment has not fully translated into consumer behaviour and actual spending in aggregate. The challenge is that the impact of the rate rises has not hit the economy fully.
“Goods spending is beginning to downshift from a very elevated level.
“In contrast, services spending slumped to depressed levels during the pandemic but has been recovering rapidly of late.
“So, against a broad trend of a softer consumer we expect the story of a goods spending recession to come sharply into focus in the near term.
“Services spending will likely take longer to slow, and the slowdown will likely be a lot less dramatic.”
Deloitte Access Economics is expecting caution to extend further than just goods, with consumers expected to also pull back on services, which could result in a broader based “consumer recession” later this year.
However, it’s not expected to be a uniform across the retail landscape. Over the past six months food sales in real terms have continued to grow by 1.7%. Non food retail on the other hand has been in the dog house, with sales falling by 3.7%.
“We’re also seeing consumer bases react differently to the economic environment,” says David Rumbens, Deloitte Access Economics partner.
“Younger people have been disproportionately impacted by the higher cost of living, particularly via rents, and so are curbing spending more than older Australians.”
However, retail price growth has started to ease.
“In part, the more modest retail price growth comes down to discounting, and particularly apparent in apparel and department stores,” says Rumbens.
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