UK recession fears grow as shoppers cut spending ‘to save for Christmas’

Fears that the UK is heading for a recession this winter have intensified amid signs Britain’s hard-pressed households are cutting spending as they save for Christmas and higher fuel bills.

Two monthly snapshots of retail activity found shops and online outlets struggling because of consumer budgets being squeezed by dearer mortgages and the UK’s lingering cost of living crisis.

The British Retail Consortium – the industry’s lobby group – and Barclays said sales were down in October once inflation was taken into account.

The Bank of England has raised interest rates 14 times since December 2021 but the downbeat reports from retailers suggest the Bank of England’s action to bring down inflation has come at the expense of weaker consumer confidence and lower sales volumes.

Barclays said card spending rose by 2.6% in the year to October, significantly slower than the 6.7% inflation rate measured by the latest consumer prices index. The BRC/KPMG monitor of retail activity said sales were up 2.5% on October 2022 but stressed its figures were not adjusted for inflation.

News of the slowdown came as the latest health check on the UK construction sector from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed housebuilding contracting for an 11th successive month.

The S&P Global/Cips report showed all three categories of construction – infrastructure, commercial property and housebuilding – below the 50 level that marks the cut-off point between a growing and declining sector. But of the three, housebuilding was the weakest, registering a score of 38.5.

Meanwhile, evidence that consumers are wary of committing to big-ticket items emerged from the latest car sales figures from the Society of Motor Manufacturers and Traders. These showed a near 30% year-on-year jump in fleet sales but only a 0.3% increase to 62,915 in sales to private buyers.

Helen Dickinson, the BRC’s chief executive, said: “Retail sales growth slowed as high mortgage and rental costs further shook consumer confidence. Many households are also delaying their Christmas spending in the hopes they can grab a bargain in the upcoming Black Friday sales. The cost of living squeeze meant more was spent on lower-price indulgences, such as beauty products – the so-called ‘lipstick effect’. Meanwhile, the arrival of some colder weather helped to boost fashion sales, particularly for outdoor wear.”

Dickinson said retailers were cutting prices and streamlining operations as they sought to produce an affordable Christmas for their customers but this was being jeopardised by a £470m-a-year rise in business rates facing retailers next year. She called on Jeremy Hunt to freeze rates in this month’s autumn statement to prevent extra cost pressure from pushing up prices.

Paul Martin, the UK head of retail at KPMG, said: “While consumers are now operating in a lower inflationary environment compared to October last year where inflation peaked at over 11%, there is no doubt that the last 12 months have taken a toll on confidence and their ability to spend. Coupled with a higher interest rate environment, dwindling Covid savings and the heating coming back on, beleaguered consumers are thinking very carefully about how they spend their money. As a result, the strong demand that has kept some retailers afloat over the last 18 months is now falling away.”

The Bank of England said last week it expected the economy to flatline in the second half of 2023. Threadneedle Street has pencilled in zero growth for the third quarter and 0.1% expansion in the final three months of the year. Official figures for the July to September period will be released on Friday.

Barclays said consumers had detected a new form of shrinkflation known as slack-filling. Seven out of 10 shoppers had noticed examples of product packaging hiding unnecessary empty space inside, it said.

Esme Harwood, a Barclays director, said consumers had been cutting back on non-essentials such as clothing and restaurants in October, with thoughts turning to saving for Christmas and budgeting for winter fuel bills.

“The unseasonably warm weather also hampered spending on indoor experiences, including digital streaming services and takeaways. However, pubs, bars and clubs still achieved strong growth, boosted by England’s performance at the Rugby World Cup, while the travel sector benefited from a rise in holiday bookings,” she said.