els, and nominal wages would likely increase. But, she forecasted that real wages are unlikely to increase, as inflation – currently at 7.4 per cent – continues to undermine purchasing power. Timbrell said that the high rate of inflation in Australia was largely due to excess demand – caused by Covid-19-related fiscal stimulus and private savings accumulated over the last few years – and consumers being unable to leave the country. This led to higher-than-usual domestic spending, which the Reserve Bank of Australia (RBA) is trying to curb via consecutive interest rate hikes. She said that the RBA would likely prefer a recession, compared to a long-term inflation problem. “Recession cycles make us poorer in the short term, while inflation makes us poor long term,” Timbrell said. Amid a decline in retail spending, Timbrell noted that certain categories, such as dining and travel, have remained resilient. She explained that customers have shifted their spending habits from home improvements and upgrades, to the service industry and social events, as Covid-19 restrictions have eased. “Even when we adjust for inflation, people are spending more on dining every single quarter,” she said. “But throughout the year, we’re going to see [less] spending per person overall.” Lipstick effect According to Timbrell, population growth will provide some protection for Australian retailers amid the expected spending downturn.  In accordance with ANZ forecasts, she believes that population growth would likely return to pre-covid levels by the end of the year. This would help to ease the tight labour market, where the unemployment rate is below four per cent – a figure that was achieved only once between 1975-2021.  Timbrell also anticipated that employment levels would remain high, and that nominal wages will accelerate even if the economy slows. However, rate hikes will continue to squeeze spending for people with a mortgage.  The retailers expected to be most affected by this are likely to be brands specialising in discretionary items with a relatively high price point, such as cars, furniture and home renovation. However, the ‘lipstick effect’ will see consumers choose to purchase more affordable goods – for instance, beer, chocolate and lipstick – as a way of treating themselves when times are tough.  “I like to think of it as a funnel of consumption [where] people move from big to smaller items. It’s why [these categories] are more resilient. [But for] items like electronics, furniture and homewares, the period of pent up demand is probably over.”  Amid this forecasted spending slowdown, she believes that retailers who are sitting in the middle would lose some consumers who look to purchase cheaper goods, and gain others who were previously buying more expensive items, but are now seeking more affordable luxuries. “That balance is going to depend on how discretionary [the product] is, the type of customer they are targeting and a range of other factors,” Timbrell said. From the city to the suburbs Timbrell noted that there was a change in where people were spending money. For instance, fewer customers are shopping in the CBD, as they opt to work from home. As a result, there’s been an uptick in suburban shopping.  “By the time the labour market is loose enough that employers have [their] bargaining power back, the cultural moment would have moved on,” she said. “[If there were] 100 people in the office in Sydney or Melbourne CBD pre Covid-19, there’s 50-60 now. That means more suburban shopping, and more people driving to shopping centres rather than walking to [nearby shops in the city].” She added that, in the second half of this year, per-person spending is expected to go backwards. “The full impact won’t be seen until the end of this year, and early 2024,” Timbrell said.