Retail spending to remain sluggish in 2023

Following last week’s disappointing retail figures from the Office of National Statistics that showed another downturn in retail sales — the ninth consecutive month the index has decreased — EY predicted that the squeeze on sales will continue for much of this year.

According to the ONS, on a year-on-year seasonally adjusted basis sales by value (amount spent) increased 3 per cent YoY (this growth is primarily due to rising prices), but sales by volume (quantity bought) fell 1 per cent YoY.

For 2022 as a whole, sales by value rose 4.8 per cent, while volumes fell 3.4 per cent.

The drop in sales volume was driven almost entirely by a fall in non-food stores.

Martin Beck, chief economic adviser to the EY ITEM Club, said the retail sector ended 2022 on a downbeat note as sales volumes fell 1 per cent month-on-month on an including-fuel basis in December, while November’s outturn was revised down to a 0.5 per cent month-on-month decline from a fall of 0.4 per cent.

“All four main sub-sectors reported flat or falling sales in December, though the large month-on-month decline in total sales was almost entirely due to a 2.1 per cent fall in sales in non-food stores,” he said. 

“December’s decline meant that retail sales volumes fell 3.0 per cent in 2022 as a whole. This was partly a reflection of the post-pandemic normalisation of spending patterns, and partly due to very high inflation squeezing household spending power. Households face another decline in real incomes in 2023, owing to still-high inflation, rising debt service payments for mortgage holders and tighter fiscal policy. So far, there has been an apparent reluctance for households to push against these forces by saving less or borrowing more, and it’s uncertain whether this pattern will change in the near-term. 

“The poor outturn for retail sales in December comes on top of a weak set of Purchasing Managers Indices (PMIs). Factoring in also the disruption caused by widespread industrial action, it’s likely that GDP fell that month. Therefore, it remains touch-and-go whether GDP fell again on a quarter-by-quarter basis in Q4 2022.”

Helen Dickinson, chief executive of the British Retail Consortium, said the high cost of household bills, particularly for energy and rising food inflation, made for a difficult Christmas backdrop with falling consumer confidence.

“Nonetheless, increased discounting helped boost gift giving, with stronger sales growth for clothing and furniture,” she said.

“It is clear that inflation took its toll on the whole of 2022, with retail volumes falling 3.4 per cent over the year, the biggest drop on record. Many of the cost pressures bearing down on retailers and their customers remain in 2023, with high energy costs, the war in Ukraine, and domestic labour shortages all taking their toll. However, BRC modelling suggests the situation will improve in the second half of the year.”

The British Independent Retailers Association CEO, Andrew Goodacre, said the latest data is confirmation that December and the festive period were disappointing for retailers.

“There seems to be widespread acceptance that inflation will fall this year with the costs of energy falling and so the government must use the Spring statement in March to announce ways of boosting the economy,” he said.

“Levelling-up projects were announced but they are long-term projects. Independent retailers need something this year if the high streets are to thrive again.”