Omicron made it a tricky Christmas for retailers – EY ITEM Club comments

• Changes in consumer behaviour driven by the spread of Omicron are the likely cause behind the 3.7% month-on-month (m/m) fall in retail sales in December. But sales volumes were still 2.6% above their pre-pandemic level.
• Omicron’s economic disruption should be short-lived. But the retail outlook this year faces challenges from the cost of living pressures facing households and a likely rotation in consumer spending from goods to services.

Martin Beck, chief economic advisor to the EY ITEM Club, says: 

“The spread of the Omicron variant in December made it a tricky month for retailers. Sales fell 3.7% month-on-month (m/m) compared to November’s (downwardly revised) 1% rise and represented the biggest fall since January. Among sub-sectors, lower footfall contributed to a 7.1% m/m fall in non-food sales – although this also likely reflected some payback for November’s very strong reading – while fuel sales were 4.7% lower as more people worked from home. Retailers received limited support from a shift to remote purchases: online spending as a share of the total was 26.6%, only 0.3 percentage points up on November. That said, December’s fall left retail volumes still 2.6% above their pre-pandemic level.    

“But with COVID-19 case numbers falling, high-frequency data suggests consumer activity has started to recover and ‘Plan B’ Covid restrictions in England will end on 27 January. This suggests that the economic fallout from Omicron will be short-lived.

“But the retail sector still faces two significant headwinds. One is the squeeze on household incomes from rising inflation – the CPI measure ended 2021 at a near-30-year high – and a rise in energy bills and personal taxes in April. The second is a continuation of the rotation in consumer spending from goods to services set in train last year as the economy reopened. A return to more normal spending patterns was probably slowed by Omicron, but it should now pick up.”