Jan 20, 2023

UK Retail Sales Fall Unexpectedly Finishing Worst Year on Record

Lucy White and Tom Rees, Bloomberg News

(Bloomberg) -- UK retail sales fell unexpectedly last month, finishing the worst year on record as a brutal cost-of-living squeeze pointed toward more pain ahead for the economy.

A 6.1% drop in the volume of goods purchased in shops and online reported by the Office for National Statistics on Friday was the sharpest since records started in 1989. A separate report showed consumer confidence slid for the first time in four months.

The figures underline a deteriorating outlook for the UK, which is the only Group of Seven nation that has yet to recover its pre-pandemic level of output. That’s adding to pressure on Prime Minister Rishi Sunak to come up with a growth plan after spending the first few months of his premiership trying to tamp down on soaring prices.

The situation complicates the Bank of England’s response to inflation, which despite ticking down for a second month in December remains near a 41-year high and is more than five times the targeted rate. Higher prices are draining the spending power of consumers, while a shortage of workers is pushing up wages and fanning inflationary pressures.

Investors expect the central bank to deliver a 10th consecutive interest-rate increase next month, bringing borrowing costs to 4%, the most since the global financial crisis more than a decade ago.

BOE Governor Andrew Bailey on Thursday said he hoped the UK had turned the corner on inflation but that officials were weighing each piece of data carefully to gauge how to act, looking especially at labor market figures.

Official data this week showed wages growing at the strongest pace on record aside from the period when the pandemic started. A survey on Friday showed employers stepped up hiring in January, which may put more upward pressure on wages.

Money markets pared bets on where interest rates will peak by 2 basis points to 4.53% according to swaps tied to policy meeting dates.

What Bloomberg Economics Says ...

“The biggest income squeeze in a generation continues to hit the UK High Street hard. While we expect the economy to show it stagnated at the end of last year, the unexpected drop in retail sales highlights downside risk to this. Given the ongoing squeeze on incomes, we see consumer spending remaining under pressure going forward.”

—Niraj Shah, Bloomberg Economics. Click for the REACT.

Retail sales fell 5.8% from a year ago including fuel sales, the sharpest December decline since records began in 1997, the Office for National Statistics said Friday. That was more than the 4% drop economists had expected.

The drop in December was driven by non-food sales as “consumers cut back on spending because of increased prices and affordability concerns,” the ONS said. Supermarkets reported people stocked up early for Christmas then pared back in December.

“This was due to increased food prices and the rising cost of living,” said Heather Bovill, ONS deputy director for surveys and economic indicators.

In a sign of how red-hot inflation is eroding consumers’ spending power, sales were 13.6% higher in value terms in December compared with pre-Covid levels, but volumes were 1.7% lower. That means consumers are having to pay more to buy less.

The highest increase in consumer debt in over 18 years appears to have helped some parts of the UK’s retail sector, with Britons borrowing to buy products ranging from high-ticket electronic items to basics such as milk.

A borrowing binge has taken off in the UK with credit card activity rising at its fastest pace since March 2004, an increasing number of pensioners using buy-now-pay-later and retailers reporting that many shoppers are turning to finance. Meanwhile, one British pawnbroker’s loans have struck a record high.

Read more: Credit Binge Sees UK Shoppers Use Debt to Buy TVs and Milk (1)

Retailers had reported a mixed picture about sales before the official figures were released.

While high street giant Next Plc reported a better-than-expected Christmas, with sales of full-price items up almost 5% year-on-year in the nine weeks to Dec. 30, online clothing titan Boohoo Group Plc’s revenues in the four months to Dec. 31 slid 13% against the same period in 2021.

And while Lidl Ltd., J Sainsbury Plc’s and Marks & Spencer Plc all had strong trading over Christmas, shoe company Dr Martens Plc and online fashion store Asos Plc both struggled.

Postal strikes in the run-up to Christmas drove more customers into bricks-and-mortar stores over online shopping. E-commerce accounted for 25.4% of total sales, down a half percentage point.

Inflation “hit consumers and retailers hard” over Christmas, said Erin Brookes, managing director and head of retail in Europe at restructuring firm Alvarez & Marsal.

“The combination of rail and postal strikes in December provided retail with a double whammy of disruption, restricting the number of shoppers in-store and parcels reaching doorsteps in time for Christmas,” she said.

The figures prompted warnings that retailers should brace for worse to come.

“With a renewed fall in consumers’ confidence in January, that weakness is very likely to continue as the broader economy slips into recession in 2023,” said Olivia Cross at Capital Economics. “Some of the resilience the economy towards the end of last year appeared to peter out.”