The return of consumer confidence in Australia: Are we there yet?

The latest EY Future Consumer Index data shows a ray of light cutting through the dark clouds that have borne down on Australian households in recent times.

In brief:

• Australian consumers are still cautious about spending every dollar as a range of uncertainties loom large on the horizon
• A slight upward shift in sentiment is a positive sign for consumer brands preparing for the sales season
• However, consumer-facing organisations should watch out for several ‘wildcards’

Australians are frustrated and fatigued by enduring economic uncertainty. However, after a prolonged period of pessimism, with little indication of the dark clouds lifting over the past 18 months, key consumer research shows that some rays of sunlight may have forced their way through the gloom.

It is early days to call any sort of pronounced lift in sentiment, with the mindset and disposition of consumers remaining fragile. It has been an emotionally fraught time for many Australians.

We also know that the pathway out of sustained consumer despondency is invariably slower and more staggered than the decline. Rebuilding consumer confidence takes time. People often absorb and embrace the pervasive collective mood of pessimism and stopping this negative contagion can be challenging. However, when shifts start to occur, as they seem to be now, it is important to understand the drivers of the change.

Launched in 2020, the EY Future Consumer Index provides in-depth insights into evolving consumer values, behaviours and priorities in a rapidly changing world. Thirty countries are captured twice a year, and we have recently run an additional national survey in October 2024 with a specific focus on Australian consumer sentiment, behaviour and values.  

So, how should consumer-facing organisations make sense of how Australians are feeling?

Consumer sentiment: negative and positive signs

The first step to navigating the prevailing and emerging conditions is to understand what is going on – and it is fair to say there is tension in the data. To start, let’s look at some observations on the negative side of the ledger.

• Cost of living pressure: The data has held firm for an extended period. Eight in 10 consumers remain worried about the cost of living (78%). Families with younger children and a mortgage have been the hardest hit. Respite is elusive and the pressure is palpable.
• Economy concerns abound: Amplified by the extended nature of the downturn, six in 10 Australians say they are worried about the economy. This has been consistent over the past 12 months.
• Intensified financial grind: Over half of Australians feel they are under more financial pressure now than they were 12 months ago. It has ratcheted up and markedly changed their consumption behaviour. Very few (only 12%) feel that the pressure has abated to some degree.
• Disunity and disconnection unsettle: Society feels more fragile and fractured. History shows people can turn inward when they feel vulnerable, particularly in times of deep economic uncertainty, geopolitical instability and perceptions of rising crime. Perspectives are pushed in different directions and to the extremes. The level of concern over social and global cohesion is reflected in one in two consumers (51%) saying they are concerned about tensions and divisions in society, with a slightly higher proportion (60%) concerned about foreign conflicts and wars.

Our data shows Australia is still at a low point, with pessimism remaining rife. Restraint is the order of the day in many categories. However, hope springs eternal, and history shows cycles do bottom out and sentiment eventually turns north. There is some indication we may be at that point now and a few positive areas are emerging:

• A better 2025: It’s been a tedious slog for many consumers, but large proportions have belief in a better tomorrow. One-third of consumers (34%) say they expect to be financially better off in 12 months’ time and a further 40% say they will be about the same. While still significant, only a quarter feel they will regress and may be worse off. The shift is predicated on a wide range of factors that we explore below, but it shows early signs of optimism for 2025.
• Consumer confidence signals: Some of the signs in our October wave of research are reflected in the Westpac-Melbourne Institute Consumer Sentiment Index¹, which rose by 6.2% in October. This is the most promising increase since the Reserve Bank of Australia (RBA) began tightening interest rates two and a half years ago. While this is a small uplift, it is significant, as sentiment has been oscillating in a fairly tight negative band for two years. Anything that breaks that dynamic requires attention.
• Spending mindsets: Fewer people now feel that rising costs are making it tough to afford essentials (41% in October, compared with 50% in April), and fewer are cutting back on non-essentials (53%, down from 61%). This is an incremental but important shift in spending mindset.
• Business confidence: There remains a stark contrast between low consumer confidence and the comparative fortitude in business confidence, with the latter sitting at the long-term average while consumers languish well below and feel despondent. Business confidence is pivotal to driving investment and growth, along with creating employment stability.

Consumers have been caught in a holding pattern over the past two years as inflation has peaked and tapered (although it has remained stubbornly outside the RBA’s range). Over this period, households have been wary of further rate hikes. However, the data around interest rate expectations clearly shows that the fear of further rate increases has abated. This is a crucial factor in shaping consumer sentiment into 2025.

For some economists, and certainly for consumers, an interest rate cut would be a ‘bellwether’ that suggests the economy is stabilising, in turn boosting confidence and spending. However, interest rates remain a significant ‘wild card’ – we don’t know for certain what the RBA will do next. The global economy is still facing turbulence, which could affect future decisions and market stability. While there is some optimism, it hinges on the hope that relief is on the horizon.

Wildcard #2: Job security

Job security is another wildcard that may subdue a positive shift in consumer sentiment. Over a third of employed Australians (35%) are concerned about their jobs. While the labour market remains tight, unemployment and underemployment are below long-term averages and productivity growth remains weak amidst elevated labour costs. 

Wildcard #3: Consumer spend intent

The Australian Retailers Association⁴ expects a $69.7 billion boost in retail sales during the six-week peak season leading up to Christmas, marking a 2.7% increase over 2023. However, given this is lower than the inflation rate, it suggests a fall in real retail sales.

While signs of a shift are emerging, we are far from seeing spendthrift, hedonistic spending as we head into the sales season. There are indications that consumers will show restraint right through to the Christmas period. When we asked Australians about their plans for the major sales events, Black Friday and Cyber Monday, as well as their festive shopping intentions, a sense of deep caution prevailed. It seems splurging is on hold – at least for now.

What can consumer-facing organisations do to cheer the cautious consumer?

The era of consumers wanting to stretch every dollar as far as possible is far from over.

The return of consumer confidence is likely, at least initially, to be gradual and uneven. There are plenty of “ifs” on the horizon – if interest rates are cut, if job security improves, if inflation falls within the target band… and so on. But if key elements converge, then it will rebound and there will be a point at which sentiment accelerates at pace.