Press release

17 Jan 2020 London, GB

Major jolt for UK economy as retail sales slumped in December

Much weaker than expected and disappointing news for the sector as retail sales volumes fell 0.6% month-on-month in December after a 0.8% drop in November.

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  • Much weaker than expected and disappointing news for the sector as retail sales volumes fell 0.6% month-on-month in December after a 0.8% drop in November. This limited year-on-year growth to just 0.9% in December. There had been speculation that the November performance had been adversely affected by the relatively late Black Friday, and that this would be reflected in a bounce-back in December – but this was clearly not the case, and consumers were reluctant to spend over the crucial Christmas period.
  • December marked the fifth successive month that retail sales had either contracted or been flat, the longest monthly run without growth since records began in 1996.
  • Retail sales volumes fell 1.0% quarter-on-quarter in the fourth quarter, which was the weakest performance since the first quarter of 2017. The ONS indicated that this would make a negative contribution of 0.05 percentage point to UK GDP in the fourth quarter, thereby increasing the risk that the economy contracted slightly.
  • It is clear that consumers adopted a more cautious approach over the fourth quarter amid heightened domestic political, economic and Brexit uncertainties. Meanwhile, there has been some slippage in consumer fundamentals after steady improvement through to mid-2019. Latest ONS data show that real household disposable income fell 0.5% quarter-on-quarter in the third quarter of 2019 after a gain of 0.9% in the second quarter, thereby reducing year-on-year growth to 0.9% from 1.6%.
  • The poor retail sales data over December and November will undoubtedly fuel expectations that the Bank of England will cut interest rates on 30 January after the first MPC meeting of the year. At the very least it may well increase the MPC’s desire to see evidence that economic activity and confidence is picking up following the decisive General Election result. 
  • It remains to be seen to be seen what impact December’s decisive General Election result and now certain UK exit from the EU on 31 January with Boris Johnson's deal has on consumer behaviour. There are signs that there was at least an initial lift to confidence.
  • Meanwhile, the fundamentals for consumers are likely to be relatively decent over 2020, although we suspect that earnings growth will remain below the peak level seen in mid-2020 and that employment gains will be modest overall. However, inflation is expected to be lower overall in 2020 while some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“A major jolt for the economy as retail sales came in substantially weaker than expected as they fell 0.6% month-on-month in December. This followed a 0.8% drop in November (revised down from a previously reported fall of 0.6%).

“December marked a record fifth successive month that retail sales had either fallen or been flat.

“The year-on-year increase in retail sales volumes was limited to just 0.9% in December, although this was up marginally from 0.8% in November, which had been the lowest annual growth rate since April 2018.

“There had been speculation that the November performance had been adversely affected by the relatively late Black Friday, despite the ONS attempts to allow for this (it occurred on 29 November while the ONS reporting period for November retail sales was 27 October – 23 November) and that this would be reflected in a bounce back in December – but this was clearly not the case and consumers were clearly very reluctant to spend over the crucial Christmas.

“Retail sales volumes fell 1.0% quarter-on-quarter in the fourth quarter, which was the weakest performance since the first quarter of 2017. The ONS indicated that this would make a negative contribution of 0.05 percentage point to UK GDP in the fourth quarter.

“Sales in non-food stores fell 0.9% month-on-month in December and were down 1.1% year-on-year. There was a particularly sharp drop of 2.0% month-on-month in sales of textiles and clothing.

“Sales at department stores fell 1.8% month-on-month in December.

“Food sales slumped 1.3% month-on-month (the largest monthly fall since December 2016) and were down 0.7% year-on-year in December.

“The annual retail sales deflator was stable at 0.3% year-on-year in December. It had previously climbed to 0.3% in November from just 0.1% in October, which was the lowest level since October 2016.

Outlook for consumer spending

“It remains to be seen to be seen what impact December’s decisive General Election result and now certain UK exit from the EU on 31 January with Boris Johnson's deal has on consumer behaviour. There are signs that there was at least an initial lift to confidence with a Barclaycard survey showing a marked rise.

“The fundamentals for consumer confidence are likely to be pretty decent for consumers over the coming months, although annual earnings growth is unlikely to match the 11-year high of 3.9% that was seen in the three months to July 2019 and employment growth is unlikely to match the overall level seen in 2019.

“Average earnings growth moderated to 3.2% in the three months to October and we suspect it is likely to stabilise around this level. We also suspect that employment growth will be modest over 2020.

“However, good news for consumer purchasing power saw consumer price inflation fall to a more than three-year low of just 1.3% in December. We suspect it will remain low over 2020 averaging around 1.5%.

“Some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April.

“There are other factors which may limit the consumer spending. In particular, with uncertainties far from over and the savings ratio still relatively low, many consumers may be keen to avoid dissaving. Meanwhile, lenders have tightened lending standards.”