Retail sales have held up very well this year. There are reasons to be cautious about the final quarter of 2018, but there is no real sign of an underlying slowdown in the rate of retail sales growth. We think that the prospects the Christmas season are good – not outstanding, but not bad either. We expect that the recent momentum is likely to be maintained and think that retail sales will grow at about 4% both in the final quarter and in December itself.

Retail sales growth stable

Retail sales have held up well so far this year, although there was a boost to consumer confidence in the Spring and Summer from a royal wedding and a better than expected performance in the world cup. But then came a sharp downturn in September and that is the main reason for uncertainty over the forecast for Christmas.

The next chart shows how erratic the monthly figures can be (especially because of the timing of Easter), so we also show the annual average figures both in value and volume terms. The value figures have been remarkably stable. The growth in the amount people have been prepared to spend has not changed much, but the amount they actually buy has. There was deflation in retail prices in 2016, then with the weakness of sterling following the Brexit vote inflation rose sharply. It has eased back a little in 2018.

But we need to account for the sharp fall in retail sales growth in September 2018

Figure 1: Retail sales growth, value and volume, 2016-18
[graphic: image 1]
Source: Office for National Statistics/Mintel

The economy

The economic background has been good for consumers, though not without a few problems

Real incomes have been rising, following the anniversary of the fall in sterling and the lagged effect of rising wage increases. In the next chart, when wages are rising faster than inflation, then real incomes are rising. That was the case in 2015 and 2016 and then again in 2018 to date.

Figure 2: Real incomes, 2015-18
[graphic: image 2]
Source: Office for National Statistics/Mintel

The chart also illustrates how inflation has moved with the sharp upward move through the second half of 2016 into 2017 and then a modest fall into 2018. There was an unexpected fall again in September, but that is likely to be exceptional. Fuel prices are rising and we think that food prices will rise as well. The drought in Summer 2018 was not just a British phenomenon. It affected the rest of Europe as well. The hot weather has reduced yields and that will lead to higher prices over the next 12 months (though not across the board, the prospects for the wine harvest are excellent).

Two other factors need to be mentioned

Interest rates have started to move up. So far we have had two quarter point increases the first in November last year and the second in August this year. No further increase is expected till next year. As the retail sales data shows, the first increase had minimal impact on spending. The latest must have been a contributory factor to the recent weakening in retail sales growth

Unemployment: One of the main reasons for the increase in interest rates is the bank’s concern that the economy is overheating. Unemployment continues to fall and employment is at a record high rate. If there are not enough people to fuel the growth in the economy then wages tend to rise as employers compete for staff. The threat of Brexit is seen as one of the main factors behind this problem – foreign workers are more reluctant to try to get into the UK.

Consumer confidence starts to fall

Mintel’s own consumer tracker shows how consumers are reacting to the economic conditions. Confidence held up well in the Spring and early summer – the royal wedding and football world cup must have had a significant impact. But the sharp fall over the last couple of months comes as something of a surprise. The three lines in the chart show how people feel about their finances at the moment and how they feel about how they compare with last year and how they feel about them over the next year. All three have turned down.

We are usually sceptical about the influence of the media, but the combination of an interest rate increase and growing adverse comment about the impact of Brexit are, perhaps, having an impact.

Figure 3: Consumer confidence, 2015-18
[graphic: image 3]
Source: Lightspeed/Mintel

Are they right to be cautious?

There’s a lot of uncertainty about, though there’s nothing new about that. But after two increases in interest rates, the threat of further ones becomes more credible and Brexit is no longer a long term worry and it is noticeable how almost all the media comment is negative. There is a noticeable lack of comment about what a great opportunity it could be.

Perhaps people really are worried, though in general we feel that British consumer spend on the basis of how well off they feel and not on what might happen. The only exception to that has tended to be when we have had a better than expected Christmas and there’s been a feeling that “next year is going to be awful, lets have a good time now”.

Black Friday – did it peak last year?

There are many unknowns about the prospects for Christmas and the development of Black Friday has added another. There is little point in saying again that this is the retail industry collectively shooting itself in the foot, most retailers now take part, in most cases because they are afraid of losing out by not doing so. The big players, such as Amazon and Dixons Carphone, plan carefully for it and put a lot of emphasis on special purchases which allow them to maintain their margin, though for Amazon “Prime Day” in July is a bigger event.

There is some disillusionment beginning to show from consumers and some statistics from the consumer research for Mintel’s report on last Black Friday, January 2018, are worth repeating. 57% of internet users said that they had at least browsed for products and 41% said they had bought something. Peak usage was among the 25-34 year olds and electrical goods are the most bought items.

However, two thirds agreed that “Black Friday discounts are not as good as they are made out to be (and only 8% disagreed) and 45% agreed that Black Friday promotions were not as good as previous years (and 9% disagreed).

The damage being done to the retail sector is obvious from the fact that 64% agreed that “frequent promotions in the lead up to Christmas mean that you don’t need to pay full price for gifts” (and only 5% disagreed).

Impact on Christmas sales

Some retailers – notably M&S and Asda do not take part in Black Friday and it will be interesting to see whether this growing disillusionment leads to fewer promotions this year. It seems unlikely that Black Friday will be any bigger this year than the growth in underlying retail sales would suggest. So the impact of spending brought forward from December will be, at worst, no bigger than last year.

Christmas 2018

Retail sales growth has slowed over the last three months, but not to the extent that there appears to be an underlying slowdown in retail sales. And yet we are inclined to be a little cautious. Confidence is falling, interest rates have risen. It’s true that we may well have the “Titanic” effect - “next year is going to be awful, let’s have a good time now” and there may also be a boost to December demand from a weaker Black Friday.

But we are nervous that the underlying rate of growth may be a little lower than we have seen from retail sales so far, especially over the Summer. (Royal Wedding, World Cup and the heatwave).

So while the figures may suggest that growth will be around 4.5% in both the final quarter and December itself we are going to be a little more conservative and forecast 4% growth.

And what about 2019 – the Brexit year

Uncertainty is likely to be the dominant sentiment until we have a better feel for the terms (if any) of the Brexit deal and that uncertainty will persist until we have a better idea of what the real impact will be.

It looks at the moment that there will be even less immigration and that will lead to shortages in the labour force and that is likely to lead to inflation and higher interest rates. Disruption to trade could result in higher inflation.

It is hard to be optimistic at the moment, though much could happen between now and next March. Overall we think that it is likely that 2019 will be a tougher year for retailers.

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