U.K. retail sales fell unexpectedly in December 2022, finishing the worst year on record as a brutal cost-of-living squeeze pointed toward more pain ahead for the economy.
The Office for National Statistics reported Jan. 20 that a 6.1% drop in the volume of goods purchased in shops and online was the sharpest since records started in 1989. A separate report showed consumer confidence slid for the first time in four months.
U.K. 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.
Postal strikes in the run-up to Christmas drove more customers into physical stores over online shopping. Ecommerce accounted for 25.4% of total sales, down a half percentage point.
Inflation effects on UK retail sales
In a sign of how red-hot inflation is eroding consumers’ spending power, retail 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.
High street giant Next Plc. reported a better-than-expected Christmas, with sales of full-price items up almost 5% year over year in the nine weeks to Dec. 30. Meanwhile, 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.
Asos ranks No. 17 in Digital Commerce 360’s Europe Database. Next is No. 21, Boohoo is No. 28 and Dr. Martens is No. 159.
Inflation and UK retail 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 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.”
The figures underline a deteriorating outlook for the U.K., 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. Despite ticking down for a second month in December, inflation remains near a 41-year high. It is also more than five times the targeted rate. Higher prices are draining consumers’ spending power, 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. That would bring borrowing costs to 4%, the most since the global financial crisis more than a decade ago.
BOE Governor Andrew Bailey on Jan. 19 said he hoped the U.K. 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.
Wages growing, but consumers still borrowing for basics
Official data 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.
The highest increase in consumer debt in over 18 years appears to have helped some parts of the U.K.’s retail sector. Britons have been borrowing to buy products ranging from high-ticket electronic items to basics such as milk.
A borrowing binge has taken off in the U.K. Credit card activity has been rising at its fastest pace since March 2004, an increasing number of pensioners have been using buy now, pay later, and retailers have been reporting that many shoppers are turning to finance.
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