The retail recession

There was some relief for Rachel Reeves earlier this week when inflation fell slightly to 2.5 per cent and the economy just about managed to grow, by 0.1 per cent (although many were expecting it to be a little higher than that). 

There is no joy to be had, however, in this morning’s retail sales figures, which show that volumes fell by 0.3 per cent in December. It suggests that a modest recovery in retail over the past 12 months has run out of steam. Sales volumes were still up 1.9 per cent on December 2023, but this does little to offset the bigger picture: that retail sales have never recovered from the pandemic, and that the rise over the past 12 months does little to offset falls of 4.1 per cent and 2.9 per cent in 2022 and 2023 respectively. Retailers seem to be suffering their own long-term recession, even when the economy as a whole is keeping its nose above water. 

The retail figures fit in with a general pattern: that an apparent recovery in the economy during the first half of 2024 seems to have ground to a halt around mid-year. That does not look good for a government which was elected on 4 July. Labour is looking more and more like the party which smothered an economic bounce. It is not hard to reason why, given that the possibility of just about every tax rise under the sun was floated in the long run-up to the Budget. 

Reeves may claim to have spared working people from direct tax rises, but that is not how it feels for the working people themselves, who are perhaps a little more astute than the Chancellor gives them credit for. They will work out that a rise in employers’ National Insurance Contributions (NICs) is going to affect them indirectly, through more modest pay rises – or possibly a cut in their hours, or even redundancy as businesses struggle with the extra tax bill. It is remarkable that the economy is stalling against the backdrop of an apparently healthy rise in average earnings. But then there are still large numbers of homebuyers who are coming off low fixed rate mortgages and suffering the shock of much higher monthly payments.

There, as usual, a caveat to be read into this month’s retail sales figures: they are based on a seasonal adjustment which tries to compensate for Black Friday falling within December’s reporting period. Without the seasonal adjustment retail sales would appear to be booming, with a 10 per cent increase month-on-month – although that would have come on the back of a severe dive in November. A lot comes down to the seasonal adjustment – change the methodology slightly and you could get a very different result.

If there is any optimism to be had from December’s figures it is on the high street. Sales volumes in clothing stores rose by 4.4 per cent month on month. By contrast, non-store sales volumes (which includes online sales but also market stalls) fell by 1.9 per cent. It reinforces something which has been evident for a while: that the trend towards online shopping has stalled, if not begun to reverse. There may be hope for physical shops yet.