Growth in retail sales revived in January – EY ITEM Club comments

• A 0.5% month-on-month rise in retail sales in January interrupted a long period of near-continuous decline. After GDP flatlined, rather than fell, in Q4 2022, a better-than-expected retail performance offers another sign that activity is showing some resilience to the headwinds affecting the economy.
• However, a sustained retail renaissance will likely struggle in the short-term. Real incomes are still falling, and the impact of rising interest rates has yet to feed through in full. What's more, whether consumers will start responding to financial pressures by saving less and borrowing more appears uncertain. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “Retail sales volumes fell or stagnated through most of 2022, while 2023 got off to a better start, with sales increasing 0.5% month-on-month in January. However, January 2023’s rise reversed only part of the previous month's (upwardly revised) 1.2% fall and still left volumes 5.1% lower than in January 2022. Retail sub-sectors put in a mixed performance. Department store and fuel sales rose, but sales of food and clothing fell. 

“A sustained revival in the retail sector appears likely to struggle in the near term. Granted, some headwinds facing the sector are easing. The recent fall in wholesale energy prices is expected to translate into lower household bills from the summer, and the Bank of England is likely to bring the current cycle of rising interest rates to a close in March, if it hasn't already done so. Furthermore, some households will likely benefit from double- or near-double-digit rises in working age benefits, the National Living Wage, and the state pension in April.  

“However, while pressures on retail spending may eventually start to ease, they've far from gone away. Inflation is set to remain high this year, outpacing average earnings again. Mortgage holders coming to the end of their fixed term deals face a large rise in debt servicing payments and households are also expected to be affected by the continued freeze on income tax allowances. The possibility that consumers might compensate for these pressures by saving less and borrowing more offers a potential upside, but there's been little sign of this happening so far. This could change, as inflation falls and the mood-music around the economy improves, but 2023 is likely to be another challenging year for retailers.”