The retail recession is over but consumers are still cautious, says Deloitte Access Economics

Consumer caution will linger for some months despite the nation’s ‘retail recession’ being largely past us, a new report has found.

Australia’s “retail recession” may be in the rear-view mirror but consumer caution will hang around for at least a few months, according to a report by Deloitte Access Economics.

Following the worst year for sales growth in a generation, consumers are tipped to keep a lid on spending in the near term. But looming income tax cuts, due to come into effect from July, should aid the sector’s recovery, Deloitte’s latest Retail Forecasts report says.

Alongside the Stage 3 income tax cuts, which were overhauled in February to deliver additional relief to lower and middle-income earners, Deloitte expects rising wages and falling interest rates to further boost spending into 2025.

Population growth should deliver further relief for retailers, the report says. This year will be “a tale of two economies”, according to Deloitte Access Economics partner David Rumbens.

“We expect consumer caution to continue into the first half of this year, with retailers expected to continue discounting to entice shoppers into their stores,” he noted. “The second half of 2024, however, is expected to be a turning point for the Australian economy. Real wage growth and disinflation are expected to continue, the updated Stage 3 tax cuts will loosen purse strings, and interest rate cuts are likely.”

Deloitte expects real retail turnover to lift by 0.9 per cent in 2024, followed by a further 2.2 per cent in 2025.

It comes after a dismal 2023 that saw consumers pull back on spending amid crushing cost-of-living pressures brought about by soaring inflation and rising rates.

Consumer confidence is yet to recover: The Westpac Melbourne Institute Consumer Sentiment Index fell to 81 in January, the most pessimistic start to a year since the 1990s recession. While February’s print saw an uptick to 86, this level still points to high levels of pessimism. Retailers, meanwhile, aren’t convinced the Stage 3 tax cuts will deliver a much-needed boost to the sector.

Harvey Norman co-founder Gerry Harvey last month warned the tax relief would have little impact on spending, with cost-of-living pressures likely to see households save much of that extra cash rather than splash it on consumer electronics, furniture or whitegoods. “I think that impact will be minimal. In terms of consumer confidence it won’t do any harm, but I don’t think there will be some huge injection into the economy,” he said.

“Costs have gone up too much for everyone, costs for our shops have gone through the roof … most costs are going up all the time. Power (bills) is a problem across the whole country.”

Retailers were forced to heavily discount goods through 2023 in a bid to get shoppers to spend. But it came at a cost: According to the ABS, profits in the retail sector rose just 1.4 per cent over the year – meaning a fall in real terms – with profits down 10.9 per cent in the December quarter alone amid heavy discounting through Black Friday and Christmas sales. Amid hopes for a recovery, Deloitte warned against retailers pursuing a discounting strategy for too long.

“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,” the report says.

Originally published as The retail recession is over but consumers are still cautious, says Deloitte Access Economics