Omicron grinds down café spending in CBDs with recovery to pre-COVID levels unlikely

Weekday café transactions in Sydney, Melbourne and Brisbane are below 40 per cent of pre-COVID levels as the Omicron outbreak reinforces remote working arrangements, but a senior economist at ANZ (ASX: ANZ) believes structural changes in the workplace mean they are unlikely to hit pre-pandemic rates even when conditions improve.

ANZ Research senior economist Adelaide Timbrell says café transactions in Sydney are currently at 36 per cent of pre-pandemic numbers, versus 31 per cent in Brisbane and 28 per cent in Melbourne.

"This data does show that there is some structural change in the way people are working, and the strongest evidence of that is actually in the period between the second wave of COVID in 2020 and the Delta outbreaks in the second half of 2021," Timbrell explains.

"You can see that particularly in Sydney and Melbourne café transactions didn't get up anywhere near where they were in 2019 which means that even when there really wasn't much of COVID within those cities, or any COVID risk in some parts of that period, people still weren’t coming back into the office.

"We can even see in the Brisbane CBD where there really wasn’t any COVID for most of 2021, but it was still showing less café transactions on weekdays in the CBD."

Brisbane experienced a much deeper drop in café spending early in the year, which Timbrell notes is explained by the Queensland capital's relative lack of outbreaks compared to larger southern cities before Omicron.

"That’s why the Omicron dip actually went a lot lower in Brisbane because people had not become accustomed to that risk, and it’s something that may take a little bit longer to come back up," the economist says.

"Brisbane has had less of that shake up of the status quo. It had less months where there was widespread working from home, which means fewer people are likely to shift their working preferences and their working style as a result of COVID."

There are huge swings in the Brisbane, Perth and Adelaide data because of short, sharp lockdowns throughout 2021. In the case of Perth and Adelaide, their spending rates compared to 2019 are relatively better at 69 per cent and 71 per cent respectively.

"If we look through those short-term changes, what we're seeing is that smaller CBDs, because they didn’t have that forced experiment of a long lockdown where a lot of people are working from home, they're less likely to have as big of a structural change," Timbrell says.

"The bigger the city, the more likely we are to see more people working from home compared to pre-COVID.

"If we look at Adelaide for example, or Perth as well, what we see is that the number of people who are working from home and the number of café transactions haven’t really changed as much, compared to Sydney, Melbourne and Brisbane."

The economist does however believe that as the health risk situation improves, rates are likely to go up but will be short of 2019 levels for "quite some time". In the pandemic thus far, the best percentage achieved last year was for Sydney, rising above the 80 per cent mark.

"I think it's very possible that it will get back to that 80 per cent level in Sydney. There's no reason why if we do see a reduction in cases that we won't see an increase in office occupancy, and that economic activity in the CBD," Timbrell says.

"What we are unlikely to see, though, is right back up to that 100 per cent of pre-COVID level."

When asked whether employer in-office working mandates could turn the tide, Timbrell said the current labour market dynamics more broadly were working in favour of employees, and survey data indicates they would like to continue working from home.

"There are going to be different dynamics from business to business about how much employees are expected to go into the office. One piece of data that I think's really relevant to that is the unemployment rate and under-utilisation rate from December," she says.

"The unemployment rate is now down at 4.2 per cent, and the rate of people who either are unemployed or don't have enough hours at their current job is actually at a 13-year low.

"What that means is employees have more bargaining power than they have in the past."

She believes this means employers may face a talent exodus if they do not go along with employees’ wishes to work from home at least a few days a week.

"Of course it depends on the business and the industry, but when there are so many jobs out there and so few unemployed people, there do tend to be some changes in that bargaining behaviour," she clarifies.

In other data, she adds discretionary spending is improving across several categories as expected following the slow start to the year due to Omicron, but the most encouraging statistic relates to accommodation spending.

"One thing that jumped out at me a little bit was that accommodation spending is actually now a little bit above where it was in January 2020," she says.

"Obviously, two years’ worth of inflation means we’re not exactly where we were, but when we look at the data on accommodation, what we are seeing is that people do have some appetite to travel within Australia.

"That is a really positive thing for domestic tourism, because 75 per cent of Australia's tourism money actually comes from Australian residents travelling within Australia. Seeing those accommodation numbers is a really good sign for that."

And could this be accelerated further once Australia opens up to the world in 11 days' time?

"There does tend to be a bit of a lag between when you're allowed to travel somewhere and when people actually start doing it. We saw that when we had the Australia New Zealand bubble, but it really didn't have as much demand as some people were expecting," she says.

"We're not exactly expecting a huge rush out the gate when it comes to people coming into Australia, particularly for holiday-related or business-related tourism, but we will see a build in international tourism through the year, especially if those borders do stay sustainably open."