IndustryIssue 04 - 2023MAGAZINE
GBO_ UK retail sector

UK retail sector in recession?

While 2023’s growth will be lower than 2022’s, the forecast is above the pre-pandemic average annual retail sales growth rate of 3.6%

In response to mounting concerns that the retail sector may be heading into a recession ahead of the crucial holiday shopping season, British consumers reduced their expenditures in September, the UK officials stated.

Reductions in non-essential spending and mild weather limited sales of colder weather gear in September caused a 0.9% decline in retail sales volumes in Great Britain, according to data released by the Office for National Statistics. Alarmingly, the figure erased retail sales growth of 0.4% in August and was worse than the 0.2% monthly decline that City economists had predicted, raising concerns about the future of the British economy as inflation stays stubbornly high.

During an interaction with The Guardian, Alex Kerr, an assistant economist at Capital Economics said, “The sector may already be back in recession. This doesn’t bode well for retail sales growth in the run-up to Christmas.”

As rising grocery prices and high household energy bills continue to put pressure on budgets, industry leaders anticipate that consumers will purchase fewer and less expensive presents before the holiday season.

This year, many consumers will receive less government assistance in this area. Bank of England Governor Andrew Bailey stated that he anticipated a ‘noticeable drop’ in inflation in the upcoming months, aided by the rolling back of the Ofgem energy price cap effective from October.

Bailey told the Belfast Telegraph that there was still ‘quite a way to go yet’ until inflation returned to the Bank of England’s 2% target, even if he implied that Rishi Sunak was still on track to fulfil his pledge to halve inflation this year. In September, the figure unexpectedly held steady at 6.7%, defying economists’ predictions of a decline.

The most recent data on high street and internet purchasing shows that sales of clothes fell 1.6% in September over August. Store owners stated that sales of fall clothing had been negatively impacted by the unusually mild weather following the September that was the joint-warmest since records in 1884.

Sales of home goods and department stores decreased by 2.3% and 1.6%, respectively, month over month as consumers reduced their expenditure on large-ticket purchases, underscoring the strain on households in the face of the rising cost of living.

Retail sales are predicted to remain muted in the lead-up to Christmas due to households’ pressure from rising prices and a rapid increase in borrowing costs following 14 consecutive rate hikes by the Bank of England. The September monthly decline, according to economists, indicated that overall economic growth had likely slowed or even stopped.

“While no one was expecting the month to be a bright spot for the high street, the full picture suggests a harsher-than-expected reining-in of discretionary spending,” Sophie Lund-Yates, the lead equity analyst at Hargreaves Lansdown said.

“This is a worse slide than expected and speaks to growing anxiety and the potential that we’re looking at a steeper consumer pullback than forecast as we head into the Christmas trading season,” she added.

UK consumer confidence continues to plummet, with GfK, a company that provides a complete understanding of their consumers’ buying behaviour to clients, reporting the largest monthly decline since 1994, excluding the coronavirus pandemic, this month as households grow more nervous about the prospects for their finances and the wider economy.

The most recent GfK measure of consumer optimism fell from September’s level of -21 to a three-month low of -30 in October.

“This sharp fall underlines that the cost of living crisis, and simply not having enough money to make ends meet, are still exerting acute pressure for many consumers,” Joe Staton, the client strategy director at GfK said.

The month of September saw a slight increase in sales volume at food stores and supermarkets of 0.2%, but this was less than the 1.4% monthly increase that was recorded in August. Fuel sales volumes increased 0.8% in September following a 1% decline in August as more people travelled by car due to rail strikes, even though the price of gasoline and diesel had increased recently.

According to Jacqui Baker, head of retail at accounting company RSM UK, price-conscious consumers probably cut back on their spending before the holiday shopping season to wait for Black Friday sales.

“Consumer confidence fell sharply in October, with remortgaging at the forefront of many consumers’ minds. This will continue to weigh heavily on consumer spending, meaning retailers will have to work hard to come out on top in this year’s Golden Quarter,” she said.

The FTSE 100 share index dropped 1.3%, marking the worst closing level since late August, as the British stock market continued to lose ground.

The future of retail

The UK’s online and brick-and-mortar merchants should expect positive things from the National Retail Federation’s (NRF) 2023 prediction. The retail trade organisation predicted that retail sales would increase by 4% to 6% this year, reaching between $5.13 trillion and $5.23 trillion, during its third annual State of Retail & the Consumer virtual chat.

Following 2022’s 7% yearly growth over 2021, when retail sales reached $4.9 trillion, this is good news for merchants. And while 2023’s growth will be lower than 2022’s, the forecast is above the pre-pandemic average annual retail sales growth rate of 3.6%.

The year 2023 will be big for e-commerce as well, with sales expected to increase 10%–12% to between $1.41 trillion and $1.43 trillion. (The overall growth mentioned above takes into account online sales).

However, since the pandemic, e-commerce has changed from being a singular sales phenomenon to a component of consumers’ buying experiences. While many consumers continue to take advantage of the conveniences that come with online shopping, the NRF states that a large portion of that growth is driven by multichannel sales, where the physical store still plays a key role in the fulfilment process. Although the function of physical stores has changed recently, they still serve as the major place where consumers make purchases, making up about 70% of all retail transactions.

Therefore, customers’ ideal retailers offer both in-store and online shopping and give a seamless experience, allowing them to make purchases online and return items both ways. This confirms the results of a poll conducted by market research company Momentive, which found that the future of retail is ‘hybrid.’ Key conclusions of a Momentive investigation reveal that around 56% of adults prefer to shop both online and in-store, around 88% say it’s important for a business to have in-store and online purchase options, and around 24% are less likely to purchase online from a business that doesn’t also have a storefront.

Outlook for the overall economy

On a less optimistic note, according to NRF Chief Economist Jack Kleinhenz, the organisation predicts that the UK’s GDP will expand by 1% for the entire year, which is less than the 2.2% GDP growth expected in 2022. Fortunately, the NRF anticipates that inflation will drop further this year and will probably hover around 3% to 3.5% for all goods and services.

According to Kleinhenz, the NRF expects job growth to slow down in the upcoming months in tandem with slower economic activity and the possibility of tighter credit conditions. Before 2024 even begins, the unemployment rate is probably going to be higher than 4%.

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