UK retail sales had worst year on record amid spending squeeze

UK RETAIL sales fell unexpectedly last month, capping their worst year on record, after a cost-of-living squeeze forced consumers to pay more for fewer goods.

The volume of goods purchased in shops and online fell 5.8 per cent from a year ago, the Office for National Statistics (ONS) said on Friday (Jan 20). That was the sharpest December decline since records began in 1997, and also more than the 4 per cent drop economists had expected. 

Excluding auto fuel, sales fell 6.1 per cent, the greatest drop since 1989.

The figures underline the severity of inflation in the UK, which is lingering near its highest level in 40 years, draining spending power and causing the steepest fall in real incomes in decades. The Bank of England is likely to hike interest rates again to bring prices back under control.

Money markets pared bets on where interest rates would peak by two basis points to 4.53 per cent, based on swaps tied to policy meeting dates.

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

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

Niraj Shah of Bloomberg Economics said: “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.”

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

While high-street clothing giant Next reported a better-than-expected Christmas – with sales of full-price items up almost 5 per cent year on year in the nine weeks to Dec 30 – online clothing titan Boohoo Group said its revenue in the four months to Dec 31 slid 13 per cent against the same period in 2021.

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

In a sign of how red-hot inflation is eroding consumers’ spending power, sales were 13.6 per cent higher in value terms in December, compared with pre-Covid levels. But volumes were 1.7 per cent lower. 

That means consumers are having to pay more to buy less.

Postal strikes in the run-up to Christmas drove more customers into brick-and-mortar stores. Online shopping declined slightly, with e-commerce down half a percentage point to account for 25.4 per cent of total sales.

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 gave retail a double whammy of disruption, restricting the numbers of shoppers in-store and parcels reaching doorsteps in time for Christmas,” she said.

Retail sales dropped 1 per cent from November, after a decline of 0.5 per cent the month before. Economists had expected a gain of 0.5 per cent. 

A separate survey by market-research firm GfK showed that consumer sentiment slipped in January, and remained deep in negative territory. 

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

Olivia Cross of Capital Economics said: “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. Some of the resilience the economy (showed) towards the end of last year appears to have petered out.” BLOOMBERG