UK retail sales drop in December, raising fears economy ended 2023 in recession

A big miss for the December UK retail sales numbers, which printed below all expectations. Total sales fell -3.2% on the month, against expectations of only a -0.5% fall, and were down -2.4% on the year. The report covers the key Christmas trading period, when many retailers make a significant portion of their annual profits. But rather than spending, the figures point to consumers opting to keep purse strings tightly drawn, remaining cautious about spending too much in the face of tightening financial conditions and a worsening outlook for the labour market. And the unusually wet weather the UK experienced in December also appears to have easily persuaded many potential shoppers to stay at home.

From October to December as a whole sales fell by -0.9%, an outcome that will subtract 0.05% from quarterly GDP growth and add to fears that the UK fell into a technical recession in Q4. Even more worrying is the fact that households were in a position to actually spend more over this period, with real household disposable income estimated to have grown over both Q3 and Q4. But they instead appear to have chosen to focus on rebuilding savings and paying down debt: 2024 looks set to be another difficult year for the retail sector.

However, there are some reasons for optimism going forward. Expected falls in energy prices this year, combined with a rate of CPI still expected to return to target by the summer, will further boost household disposable incomes, while comments from the UK Chancellor are increasingly pointing to a significant reduction in the level of taxation being presented in the forthcoming March Budget, as the government attempts to position itself ahead of an expected general election later this year. And on top of these boosts, many households will this month have seen take-home pay increase following the 2% cut made to National Insurance contributions contained in November's Autumn Statement, while in April social security benefits are set to rise to offset the impact of the phasing out of Cost-of-Living grants. Overall, most households should see a year-on-year increase in disposable income, and with the savings rate already nearly 4% above the average rate seen over 2015-19, the suggestion is that a significant portion of this money will be spent rather than saved.

In the meantime, however, today’s numbers paint an increasingly difficult picture for the Bank of England (BoE) as it struggles to bring CPI back to target, with the major economic indicators for December showing growth and consumption continuing to soften but inflationary pressures proving sticky at best, and at worse potentially starting to tick higher again. It leaves the BoE very much caught between a rock and a hard place, facing strengthening economic arguments for both cutting interest rates and for leaving them on hold. Until just a few days ago markets were predicting a first interest rate cut being delivered in May, with around 100bps of further cuts then seen over the remainder of 2024. With the major economic releases for December now in, both the timing and scale of this monetary easing may need to be re-visited.