19 February 2024

Retail recession finally over

While the UK economy finally succumbed to a recession in the second half of last year (see here for why calling this a recession is a bit overly dramatic), the retail sector is unfortunately well accustomed to operating in a contracting environment having seen retail sales volumes shrink in eight of the last ten quarters. Admittedly, part of this was a come down from the pandemic boom when sales volumes jumped by almost 12%. But sales were still almost 4% below their pre-pandemic level in Q4 last year. So the 3.4% month-on-month (m/m) surge in retail sales in January, which was the biggest rise on record excluding the pandemic distortions, has brought some much-needed cheer. 

Of course, UK retail sales are volatile at the best of times and especially over the Christmas period. A small error in the seasonal adjustment around Christmas time can lead to massive m/m falls or rises in seasonally adjusted retail sales. So in reality retail probably wasn’t collapsing in December and it’s not booming now. To get a clearer picture, the best strategy is to look at the Christmas period as a whole. And here there is some real good news. Retail volumes rose 1.5% between November and January, the strongest three-month growth since August 2019. 

What’s more, strong real wage increases this year should support a return to growth for the retail sector. We expect inflation to average around 2% this year and expect real wage growth to reach 2.6% by the end of the year. That would be the strongest real wage growth in 17 years, ignoring furlough scheme disruption. If further tax cuts are announced in the Budget on 6th March that would give a further boost to disposable income. 

The big question then is not whether consumer can spend more but whether they will. The saving rate (which is the proportion of income households save) has been rising since early 2022 and now stands at about 10%, well above its long-term average of about 7%. However, mortgage rates are down from their peaks, unemployment remains very low and house prices—often an indicator of consumer sentiment—are rising again. Many households also have recently replenished the rainy-day funds they depleted in 2022. 

All in then households are unlikely to increase their saving rate, and may even lower it a little meaning that all of the boost to real incomes this year should flow through to consumption. Not all of this will be spent on goods, but the retail sectors long winter finally looks like it’s starting to thaw.

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