The latest ONS retail sales figures show volumes fell by 0.4% in February, driven by household goods sales dropping by 2.6%, clothing by 1% and online sales are down by 0.5%.

Jacqui Baker, head of retail at RSM UK and chair of ICAEW’s Retail Group, said: “Consumers remain cautious about the economic outlook, but there’s still appetite to spend, particularly for products that offer good value for money. With discretionary incomes squeezed, consumers are being forced to make a trade-off between priority areas such as health and beauty, which continues to perform strongly, and lower priority categories such as household goods where individuals are holding off for discounts.

“Overall clothing was slow, but sport clothing saw an uptick driven by an increased focus on wellness, plus the rising popularity of weight-loss drugs, which are prompting a change in diets and a desire to refresh wardrobes.

“Another fall in consumer confidence in March to -21 from -19, plus the ongoing Middle East conflict, and imminent rises in business rates and national minimum wage, means there are tough times ahead for retailers. Further uncertainty and the likely prospect of higher energy costs for households who are already nervous doesn’t bode well for consumer spending. It’s crucial that retailers act now to preserve cashflow and identify areas for cost-cutting, while maintaining the customer experience, to help them ride out the storm.”

Thomas Pugh, chief economist at RSM UK, added: “After the huge 2% rise in January, some fall back in February was always likely. Looking at the three month-on-month measure, which smooths through some of the volatility around Christmas, sales volumes rose by 0.7%, suggesting consumers were spending again at the start of the year.

“Looking ahead, though, the picture has dramatically worsened as retail sales will be squeezed by rising energy costs. The surge in fuel prices represents an immediate reduction in disposable income and this will be intensified when the utility price cap resets higher in July. What’s more, the jump in interest rate expectations will gradually depress disposable incomes as households reset mortgage deals. Given real household disposable income was set to grow by less than 1% this year anyway, a sharp increase in inflation would see real incomes stagnate or even shrink once again.

“Admittedly, the household saving rate is elevated going into the crisis meaning that consumers can save a bit less to cushion the blow to their lifestyles so the full impact on income is unlikely to flow through into spending. Indeed, this is what happened in 2022 when the saving rate dropped sharply.

“The longer the crisis goes on for the more likely consumers are to adjust spending habits in response as consumer confidence wanes. Indeed, we’ve already seen the first impact on consumer confidence with the fall in March. That sets a much tougher outlook for retailers than we were considering before the war.”

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