- Retail sales set to drop as consumers spend less and save more
- Big-ticket purchases have declined as shoppers turn to ‘little luxuries’
Christmas adverts have appeared on screens, and the shops are filling with festive offers: but is it all to no avail? Paul Martin, head of retail at KPMG, notes that this year, as is so often the case, “the health of the industry is at the mercy of macro demand” – and the signs are pointing to a challenging Christmas.
Retailers have had a better year than expected, and this month alone the likes of Next (NXT), Marks & Spencer (MKS) and B&M European Value Retail (BME) have all raised full-year guidance. But there is still concern that the overall picture is darkening. According to Office for National Statistics (ONS) data, retail sales volumes declined by 0.8 per cent in the third quarter, having grown modestly over the first half of the year. The figures suggest that rising interest rates are taking a toll, not least by subduing the housing market and depressing demand for all the things that people buy for a new home. Last month, household goods sales slumped by 2.3 per cent, with the drop driven by falls in furniture and lighting stores.
Higher interest rates are also shaking consumers in a broader sense. The GfK Consumer Confidence Index fell by nine points to -30 last month (see chart), the steepest fall since 1994 outside of the pandemic. Alex Kerr, economist at Capital Economics, thinks it’s likely that “the lagged effect of the Bank of England’s interest rate hikes may be weighing more heavily on sentiment”.
This isn’t the only thing worrying households. Following the latest GfK release, client strategy director Joe Staton said that “the fierce headwinds of meeting the accelerating costs of heating our homes, filling our petrol tanks, coping with surging mortgage and rental rates, a slowing jobs market and now the uncertainties posed by conflict in the Middle East are all contributing to this growing unease”. The confidence that buoyed consumers over the summer is starting to ebb away, and people are changing their shopping habits as a result.
The Bank of England’s latest money and credit data showed that the increase in consumer credit eased from £1.7bn in August to £1.4bn in September – a sign that households are starting to cut back on spending. According to Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, households added the most to their liquid assets in September since mid 2020. This is likely to be an attempt to rebuild depleted savings buffers, which are now (in real terms), almost back to their 2019 levels.
As consumers spend cautiously, big-ticket items are losing out: GfK’s major purchases index was down 14 points to -34 last month. Although this was higher than the same month last year, GfK’s Staton says that the sharp drop alone “will concern retailers across the land in the run-up to Christmas”. A switch to smaller purchases is showing up in the latest BRC retail sales figures, too. After last month’s release, chief executive Helen Dickinson said that the cost of living squeeze is seeing consumers spend more on “lower-price indulgences, such as beauty products”. This ‘Lipstick Effect’ – the idea that consumers swap big purchases for small luxuries during slowdowns – has been used as a recession indicator for years.
None of this bodes well for the Christmas retail season. According to KPMG’s Martin, low spending levels could mean the most “challenging” Christmas we have seen since the pandemic hit. Things won’t be much brighter in the New Year either: analysts at Capital Economics expect real consumer spending to decline by 0.5 percentage points from peak to trough over the coming quarters, as the drag from higher interest rates intensifies.
But things are not entirely miserable. Inflation is far lower than it was a year ago, meaning that wages are growing faster than prices again. And although consumer confidence tumbled last month, the GfK index is still far higher than it was last year (-30 against -47). Pantheon’s Dickens points out that the recovery in real incomes should let households save more “without reducing their spending materially”, and adds that she still doesn’t expect to see a consumer-driven recession this year. But all in all, retailers look set for a muted – rather than merry – Christmas.
