Experts weigh in: how economic conditions will impact retailers in 2023

Roy Morgan CEO Michele Levine says there’s light amid the gloom, provided that retailers are aware of, and ahead of the two-speed economy.  Here, Inside Retail speaks to senior economists, leaders and SME operators to discuss the year ahead for the retail industry amid uncertain economic times. Michele Levine, Roy Morgan CEO “As we embrace 2023, one thing is certain, we live in strange and uncertain times. With consumer confidence well below 100, inflation high, and interest rates fuelling concerns about mortgage stress and negative equity – and the continuing spectre of recession – we would expect to see highly predictable patterns of behaviour. In the normal course of events, we would expect consumer spending to be down – it’s not.  Holidaying would be down – it’s not – there are no vacancies! “Economic and social predictors and relationships are not behaving as we would expect. So, let’s unpick some of the trends and forecasts to see if we can make some sense of what the 2023 retail landscape holds in store. The ANZ-Roy Morgan Consumer Confidence Index remains low, well below the 100-point benchmark. On 8 January, it was only 87.4 points. It’s worth saying, however, that this was a 4.9-point lift from December and was the first early January lift in five years – back in January 2018, the Consumer Confidence Index was 122 points, having lifted 5.5 points on the last week of December 2017. “So how are Australians feeling about their financial standing? Only 22 per cent of Australians say their families are better off than this time last year. More than twice as many (45 per cent) say their families are worse off than last year. And only nine per cent of Australians expect good times for the Australian economy over the next 12 months, compared to a third of Australians who expect bad times. “When it comes to buying intentions, a quarter (26 per cent) of Australians say now is a good time to buy major household items, while 45 per cent say this is a bad time to buy. Looking further ahead, however, a third of Australians expect their family to be better of financially this time next year, compared to 28 per cent who expect to be worse off. “Taking all that into account, we would expect consumer spending to be down in the short term. The good news is that the modelling shows the opposite. Roy Morgan, in conjunction with the Australian Retailers Association, has developed a sales forecasting engine to give retailers practical guidance on what to expect in the future. “I can reveal that retail sales for Q1 of 2023 are forecast to be $99.9 billion, and Q2 sales are forecast to be $103.6 billion – both well up on the same quarters last year. But not all consumers are equal. Roy Morgan data reveals that consumers contribute asymmetrically to the retail economy. What we have is a two-speed economy and a two-speed recovery fuelled by consumers of unequal value. “The fast lane of the recovery is being driven by five million big-spending Australians for whom spending is driven by desire, and price is just the cost of falling in love. We call these people NEOs, short for new economic order. Simultaneously 10 million price-based traditional Australian consumers are stuck in the slow lane. We call them Traditionals. Not knowing the difference between the two is fast becoming an existential threat for retailers. “Retailers have for decades worked hard to identify the price customers are prepared to pay. In the two-speed economy, however, they need to stay ahead of the curve, and identifying the price customers are prepared to pay is not staying ahead of the curve. Staying ahead of the curve means identifying the customers prepared to pay the price. “We live in strange and confusing times. Some of the news is gloomy, and some is bright.” Dr Brendan Rynne, KPMG chief economist  “KPMG Australia anticipates 2023 will see a more challenging economic environment than 2022 even with the fact that we were dealing with ebbs and flows surrounding the Covid-19 pandemic. The key reason for this economic slowdown is the expected drop off in consumption activity by households as higher interest rates start to take their toll.  “Consumption activity has remained very buoyant in Australia over 2022 through a combination of factors including post-Covid catch-up spending, an additional 500,000 people working at the end of the year compared to the start of the year, and a small, but rising, increase in nominal wages. Set against that backdrop for 2023 will now be an environment of lower post-mortgage disposable household income, higher rents, higher cost-of-living expenses and lower employment. “Recent data shows the end of 2022 was still an economic environment that would cause concern for the RBA, with inflation rising to 7.3 per cent in November, the labour market remaining extremely tight with an unemployment rate of 3.4 per cent and job vacancy-to-unemployed ratio of 90 per cent, and global supply chain pressures ticking back up in response to the rapid spread of Covid-19 in China.  “This means the likelihood of a further 25 basis point interest rate rise in early 2023 remains high, however KPMG expects that once this has passed through, the RBA is likely to pause and allow the previous rate hikes to work their way through the economy.  This will result in further softness to the housing market, particularly in Eastern Seaboard capital cities which saw the biggest price rises during Covid. “Overall, KPMG Australia expects the Australian economy will avoid a recession this year but the annual rate of growth will slow to around 1.5 per cent by the end of the year and the unemployment rate will tick back up to around 4.5 per cent by the year end as well.” Samantha Finnegan, Madebox founder “When I read MYOB’s Business Monitor report that shows more than half of Australian SMEs are predicting a recession in the next 12 months, and that 57 per cent believe the economy will decline in the coming year, I was not surprised. “While we’ve enjoyed year on year growth at Madebox, we rely on small business suppliers for the local products we feature in our gift boxes, and many suppliers have closed shop or scaled right back in recent months. Especially those who were building their business as a side-hustle, some have had to go back to normal jobs as it wasn’t economically viable to keep pushing their dream. They’ve got to pay the bills. “Looking ahead I’m expecting to see many of our corporate clients will also pull back on their spending for the coming year, so to counter this, I’m putting plans in place to find new channels for business growth, while also reducing unnecessary costs. “Recent years have taught Australian SMEs that we need to be dynamic and agile in how we respond to challenges. I think for some businesses, it’s now or never with digital tools. Without adapting, they’ll struggle to compete. There’s so much to learn in order for us to stay relevant, so ongoing professional development is really important.  “The next 12 months are feeling scary for small businesses, so now is the time for us to support each other, buy local, shop small, and spend our money in the places where it counts.” Lindsay Carroll, National Retail Association interim CEO “Retailers and small businesses are bracing themselves for a plunge in consumer spending in the year ahead as an expected economic downturn materialises off the back of strong sales growth in 2022. “Record levels of inflation spurred by the pandemic and geopolitical events have contained Australia’s household budgets. While this led the retail sector to record nine consecutive months of growth last year, the effects of the real term slowdown in spending, a weakening of purchasing power and a drop in margins for retailers are now emerging. “However, inflation is tipped to decline following the December quarter, with multiple variables influencing the drop. First, pandemic-related disruptions to supply are being resolved. Delivery times and shipping costs have declined and pressure on prices is waning. Second, commodity prices have stabilised and, in many cases, returned to their early 2022 levels. In time, the effect of this will be evident in consumer prices. Third, the increase in interest rates here and around the world will result in slower growth in aggregate demand, which means less pressure on capacity and lower inflation. “Market uncertainty will persist, as the supply side dynamics of the global economy will continue to affect monetary policy and business operations. Petrol, food, energy and rent are impacting households and businesses, with retailers forced to pass on costs to their customers. With the current tight labour market and industrial relations reform coming into play in July, it’s possible workers will demand wage increases, which would fuel continued inflation, as well as energy and other supply shocks as the situation in Europe remains uncertain and gas prices are expected to rise again. “The forthcoming months may be turbulent for many, but the past few years have taught us that the retail sector is smart, determined and can pivot to bring new solutions to all sorts of problems. It understands that customer service will always be the first priority, and the best way forward for retailers is to focus on customers and connect with them through shared values and experiences.”