As the UK gets to grips with the ever-changing economic climate, consumer sentiment has remained pessimistic, to say the least. GfK’s November consumer confidence index remains in low, with the index at -44. The climate for major purchases index dropped three points to -41. Meanwhile, the personal financial situation outlook index reported marginal improvement to -34 (albeit still 35 points below October 2021).

In turn, spending habits have begun turning to more typical recessionary behaviours, with consumers cutting back where possible. This downward momentum was evidenced in the September ONS retail sales volume index, which reported declines of -6.9% year on year (YoY) and -1.4% compared to August 2022. In October, sales grew 0.6% on a month-on-month (MoM) basis (due to the additional bank holiday in September, and store closures for the Queen's funeral); however, on a YoY basis, sales also fell by as much as -6.1%, below pre-Covid equivalent levels by -1.7%.

What’s the outlook for the retail sector?

All eyes are now fixed on the crucial Golden Quarter for retailers and consumers alike. Retail Economics recently forecast a £4.4 billion drop in non-essential spending this Christmas, representing a 22% YoY fall in UK spending as almost 60% of customers suggest they will be cutting back. While all sectors are likely to feel the effect, previous downturns suggest bigger ticket items such as household goods/appliances, and non-essential goods such as clothing and footwear could experience a more pronounced squeeze.

As a result, retailers are downgrading their sales expectations, with some issuing profit warnings despite a relatively robust Q2–Q3 performance across the sector. Next, for example, recently trimmed its full-year 2022/2023 sales and profit forecasts, despite its half-year 2022 group sales exceeding expectations, reaching +14.9% YoY.

While inflationary headwinds are likely to stunt consumer spend across most sectors this winter, there are still some opportunities for spend across certain subsectors to surprise on the upside.

Firstly, it’s likely this winter will deliver the first Christmas period unaffected by Covid-restrictions, meaning more events and pre-Christmas socialising will occur compared to the last two years. Meanwhile, the first-ever winter FIFA World Cup is likely to generate additional food and drink sales through November–December. Similarly, international travel is likely to remain unrestricted, which, when coupled with the weak value of the pound, could support inbound tourist spend, particularly across international gateway cities such as London and Edinburgh.

In terms of the timing of winter shopping, we could be faced with a longer lead-in to Christmas as UK households look to spread their spending more strategically across paychecks, supporting sales as early as October. In a similar manner, monthly repayment methods such as Klarna can expect an uptick in transactional activity.

Where we envisage a more pronounced decline in discretionary spend is in early 2023, when inflation is expected to remain in double-digit figures, whilst fuel/energy usage costs are due to remain high (and potentially growing further depending on what measures replace the energy price cap in April 2023).

Oxford Economics is currently forecasting a YoY drop in real retail spend of -6.1% Q1 2023, accelerating from the -5.4% fall predicted for Q4 2022.

_{Read the articles within Spotlight: UK Retail Warehousing below.}