Retail spending in Australia has remained remarkably resilient during and post-pandemic despite heightened cost-of-living pressures dominating headlines. Consumers spent over AUD 35 billion per month (in retail trade) compared with AUD 28 billion per month before the pandemic, equating to approximately a 25% spending increase over that period.

While retail spending volumes (volume of goods) remained broadly stable towards the end of 2022, inflation resulted in higher prices for goods and services and became the main contributor to total retail sales growth. Retail sales were also supported by strong labour market conditions and accumulated household savings, which are now being drawn upon to cover higher living costs, mortgage repayments and sustained retail spending. Wages growth of 3.3% over 2022 also cushioned some of the cost-of-living pressures.

As rising interest rates hit the consumer, discretionary spending will likely come under further pressure as the cost of living increases. Though savings will provide some near-term support for some households, these will not be adequate to counter a greater level of caution and higher mortgage repayments, leading to a pull-back in spending. A pull-back in consumer spending poses the risk of a ‘hard landing’ impact on consumption, leading to extended recovery profile for spending.

Currently, retail spending volumes are slightly negative (Q1 2023). However, as inflation begins to be contained within target levels in the medium term, total retail spending is likely to plateau if volumes continue to trend downwards. The central bank-induced slowdown is globally synchronised and aimed at reducing aggregate demand. Strong household budgets and balance sheets have been a hindrance to that aim.

Figure 1: National retail turnover – price vs volume

Source: ABS, JLL Research

In the long term, strong population growth forecast will be a key underlying driver of retail spending, especially non-discretionary retail spending. Beyond the headline population growth rate, the age distribution is an important consideration for growth in non-discretionary retail spending. A large contingent of the population aged 26-38 years will reach peak earning and spending capacity in approximately seven years (45-55 years old), with the RBA estimating the amount of spend per annum for this cohort on average to be more than $100,000 per household.

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