That squeeze will continue in 2023, with earnings remaining below inflation for much of the year, mortgage costs rising, and reduced government support for energy bills. This, together with mixed evidence of consumers being willing to increase borrowing or save less, means the EY ITEM Club expects another weak retail performance in 2023.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The retail sector ended 2022 on a downbeat note as sales volumes fell 1% month-on-month on an including-fuel basis in December, while November's outturn was revised down to a 0.5% m-month-on-month decline from a fall of 0.4%. All four main sub-sectors reported flat or falling sales in December, though the large month-on-month decline in total sales was almost entirely due to a 2.1% fall in sales in non-food stores.
“December's decline meant that retail sales volumes fell 3.0% in 2022 as a whole. This was partly a reflection of the post-pandemic normalisation of spending patterns, and partly due to very high inflation squeezing household spending power. Households face another decline in real incomes in 2023, owing to still-high inflation, rising debt service payments for mortgage holders and tighter fiscal policy. So far, there has been an apparent reluctance for households to push against these forces by saving less or borrowing more, and it’s uncertain whether this pattern will change in the near-term.
“The poor outturn for retail sales in December comes on top of a weak set of Purchasing Managers Indices (PMIs). Factoring in also the disruption caused by widespread industrial action, it's likely that GDP fell that month. Therefore, it remains touch-and-go whether GDP fell again on a quarter-by-quarter basis in Q4 2022.”