UK consumer spending starts 2024 on a weak footing

Another disappointing set of retail sales data from the British Retail Consortium (BRC) this morning, offering no signs yet that the malaise in consumer spending is set to end any time soon. Annual sales grew by 1.2% in January, weaker than the 1.9% reading seen for December and considerably softer than the 4.2% reading seen at the same time last year. The January reading was also weaker than the 3-mth average of 1.9% and the 12-mth average of 3.4%, the clear message being that consumer spending is weakening. Post-Christmas sales saw some pickup in spending in the first half of January, but this ultimately faded away as the combination of easing inflationary pressures and weak consumer demand ultimately saw sales head lower over the month as a whole. For the UK retail sector, any boost to spending provided by the Christmas holiday period has faded quickly.

The caveat to this, of course, is that the BRC data is not seasonally adjusted and typically tends to fall at the start of the year. Accordingly, the underlying picture of spending activity may not be as soft as today’s figures suggest; a better picture of the true underlying position will be provided by the official retail sales numbers to be released next week. However, reports that many households resorted to relying on credit cards to finance spending over the Christmas period suggests that some of those households – particularly those on lower incomes – will now be forced to cut back on spending in order to pay off these deferred bills. As such, even if the BRC figures are understating the true strength of spending, the prospect of next week’s official figures being significantly stronger looks doubtful. Indeed, spending on higher value items, such as furniture and household appliances etc, remains weak, pointing to an ongoing lack of consumer confidence, a key driver behind the propensity to spend.

Going forward, the picture potentially looks a little brighter. With CPI forecast to continue falling, so wages should continue to grow in real terms, and while it will take some time for incomes to recover to their pre-cost-of-living crisis levels, some of this boost to take home pay should find its way onto the high street. Social security payments and the National Minimum Wage are also set to rise in April, providing a potential spending boost for lower income households. But with the UK tax burden set to continue rising this year, much of this additional spending power may ultimately be consumed by the government, to leave households not much better off in real terms.

Overall it is hard to find many reasons for being particularly optimistic regarding the strength of consumer demand in the UK at present, and with private consumption accounting for just under two-thirds of nominal UK GDP, the read across is that this lack of spending looks set to see the UK economy continuing to toy with recession.