The retail sector has weathered the pandemic considerably better than some other areas of the economy. Consumers were forced to switch from socialising on the high street and dining out to shopping online and eating at home. Meanwhile, the housing market frenzy boosted demand for household goods. This has left the volume of retail sales at 4.6 per cent above its pre-coronavirus level.
However, some of the strength in retail sales will fade over the rest of this year. The housing market will eventually calm down and consumers will start spending in bars and restaurants, rather than on goods.
This doesn’t necessarily mean that the retail sector should prepare for a long period of depressed sales. The outlook for consumer spending depends heavily on four factors:
- how many people are in employment;
- how much they are getting paid;
- how much they have to spend on essentials; and
- how willing they are to go out and spend.
In most cases there are reasons to be optimistic about the retail spending outlook.
The good news is that the economic recovery should be robust enough to cope with the end of the furlough scheme in September without a big jump in unemployment. We think the peak in the unemployment rate may already behind us, and the level of employment should reach its pre-crisis peak in the middle of next year. By the end of 2023 there could be about 500,000 more people in employment than before the pandemic – that’s a lot of extra customers.
The other bit of good news is that earnings are growing strongly. Earnings growth has been artificially inflated by the pandemic and the furlough scheme, but even so there are signs that underlying earnings growth is a bit stronger than it was before the pandemic.
The bad news is that the amount of money that consumers have to spend on essentials is also rising. The surge in energy and petrol prices and tax increases might reduce consumers’ disposable income next year.
This isn’t to say it’s a certainty that consumer spending will also be lower. After all, households have amassed over £200bn (10 per cent of GDP) of additional savings since the pandemic began in 2020. The Bank of England has assumed that only around 10 per cent of that will be spent, but consumers could start dipping into these savings.
Consumer confidence should recover as coronavirus and petrol shortages become dots in the rear-view mirror.
Retail executives are thinking carefully about the broader economic outlook, and in our survey they cited an economic downturn as the second biggest risk to remaining competitive.
However, the labour market should continue to strengthen over the next two years, which will underpin a strong rise consumers’ income and their ability to spend. This will ultimately benefit retail spending once shortages of petrol and natural gas fade.
N.B Figures correct as of 12 October 2021