The decline in sales volumes in October by 1.1%, following four consecutive months of growth, reflects a sector that is currently navigating a challenging environment, caught between signs of relatively high inflation and the grim reality of a cautious, financially stretched consumer base.
The latest inflation figures this week, which dropped to 3.6% for October, is fuelling speculation that the Bank of England may reduce interest rates, potentially providing relief for those remortgaging soon and easing some business fixed costs like interest on existing loans.
Reports suggest some banks are already offering lower rates, signalling this expectation.
However, any cheer is severely limited by the fact that food and other essentials are still seeing elevated price increases (food inflation rose to 4.9% in October), leaving many households feeling poorer despite the headline figure.
The uncertainty surrounding what the Chancellor’s Budget next week will mean for individuals is only further dampening consumer confidence and spending intentions.
The Christmas trading period will be critical, and early sales indicators are expected to confirm that consumer demand remains sluggish, creating a perfect storm for retailers.
The difficulties for the sector are compounded by its own high operating cost base, including fixed costs for buildings and IT, and the sticky labour costs imposed by last year’s Budget, notably increases in the minimum wage and employers’ National Insurance Contributions.
Commitments to level the playing field by reviewing the low-value imports VAT regime and potentially reinstating the VAT-free shopping scheme for tourists could provide substantial financial uplifts for UK high street and luxury brands, creating a more equitable competitive environment against international and online-only rivals.
With the Budget only a week away, the sector will be looking to the Chancellor to relieve the immediate financial pressures that the sector is facing and support long-term investment. Retailers are urging the government to refrain from introducing any new tax burdens that would further diminish household disposable income, as such measures could dampen consumer confidence and spending, ultimately impacting the sector’s recovery and long-term growth.
The UK economy would benefit hugely from government support targeted at the retail sector. Given their capacity to employ large numbers of young and low-skilled workers, these sectors can respond rapidly to labour market demands, providing an immediate stimulus to employment levels. The government would be wise to revitalise the industry as job vacancies continue to fall.
