Cost-of-living pressures knock UK retail sales in December

(Alliance News) - UK retail sales are estimated to have unexpectedly fallen in December, according to the latest data released by the Office for National Statistics on Friday.

Retail sales volumes are estimated to have fallen by 1.0% in December from November. Retail sales fell by 0.5% in November from October, revised from a monthly decline of 0.4%.

Markets had expected retail sales volumes to rise by 0.5% monthly in December, according to FXStreet.

Typically, December is a key month during the 'golden quarter' for the retailer sector, as consumers spend on Christmas festivities and gifts.

However, this Christmas, it appears the weight of the cost-of-living crisis in the UK has dampened consumer demand as households cut back amid affordability concerns.

"Even Santa has bills to pay and when the household budget is feeling uncomfortably tight the only choice available is to spend less," said Danni Hewson at AJ Bell.

Against the year prior, retail sales fell by 5.8% in December. In November, retail sales had fallen by 5.9% against the previous year.

The ONS said December's sales volumes were 1.7% below their pre-pandemic level in February 2020.

Given the disappointing reading for the UK retail sector, it's not surprising to see the GfK UK consumer confidence indicator dipped to a near-historic low in January.

GfK's confidence index, also released on Friday, dropped three points in January to negative 45 after a short-lived and weak rally in the last quarter.

The major purchase index, an indicator of confidence in buying big ticket items, fell six points to minus 40 – some 30 points lower than last January.

"Consumers are bone-weary with inflation sapping any benefits from pay rises, while those on the same pay are even worse off. It's certainly telling that the bulk of the confidence decline comes from personal finance concerns," said Sophie Lund-Yates at Hargreaves Lansdown.

The pessimistic mood comes as the rate of inflation in the UK dipped for the second month in a row in December, to 10.5%, compared to a 10.7% rise in November.

The print is down a from a four-decade high of 11.1% in October.

Danni Hewson at AJ Bell said that, for most people, the inflation number is falling doesn't mean anything.

"December's cold snap reminded us all that the cost of energy has gone through the roof and... many people reconsidered how much they could afford to splash out on their Christmas celebrations," she said.

For Hargreaves Lansdown's Sophie Lund-Yates, the retail sales data also contrasted with comments that suggest a recession "might not be as bad as feared" in the UK.

ING's Francesco Pesole agreed. The figures, he said, combined with ongoing pressure in wages and sticky core inflation, indicate that the UK economy is still showing signs that it's headed for recession through 2023.

As a result, he continued, they also point to the Bank of England being on course for one final 50 basis point rate hike at its next meeting in February.

BoE Governor Andrew Bailey strengthened the case for another half percent rise in investors' minds on Thursday, after saying that the UK bank rate is likely to peak at 4.5%, up from the current level of 3.5%.

Bailey noted that market expectations for peak UK interest rates have been cut back since the market turmoil in September and October caused by the mini-budget under former prime minister Liz Truss.

"If you go back to the height of that period, the peak of what the market thought we were going to get to was over 6%, but the time we did our forecast in November it was 5.2%, it is now down to 4.5%," Bailey said, according to BusinessLive Wales.

Helen Dickinson, chief executive of the British Retail Consortium, remained optimistic about the future of the UK retail sector.

"Many of the cost pressures bearing down on retailers and their customers remain in 2023, with high energy costs, the war in Ukraine, and domestic labour shortages all taking their toll. However, BRC modelling suggests the situation will improve in the second half of the year," she said.

Lloyds Bank was more reserved in its expectations for UK consumers.

"On the one hand, energy bills are set to rise further in April and nearly half of mortgage holders will face higher monthly repayments by the end of 2023. Conversely, strong wage growth goes some way in supporting consumers purchasing power, and a tight labour market could limit the extent to which unemployment may rise," the analysts explained.

James Smith at ING argued that persistent falls in UK retail sales were an indicator that the UK is entering a downturn.

"Coupled with another dip in consumer confidence released overnight, recession still looks like the base case for the UK economy," he said.

"Admittedly, fourth quarter GDP is likely to come in flat, which is partly down to an artificial bounce-back in activity during October following the Queen’s funeral last September. But assuming ongoing weakness in consumer spending, coupled with some potential declines elsewhere (construction and manufacturing look vulnerable), we think first quarter GDP could see a fall in output in excess of 0.5%."

UK gross domestic product grew by 0.1% month-on-month in November, slowing from October's unrevised growth of 0.5%. GDP was helped by the start of the football World Cup, which boosted consumer-facing sectors.

By Heather Rydings, Alliance News senior economics reporter

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