Partner & Managing Director, London
UK retail ended 2018 with another month of like-for-like growth in December, posting high value and volume growth of 3.1% and 2.6% respectively, helped along by heavy discounting by many retailers.
Whilst this is positive news for the sector, the retail industry continues to be polarised with winners and losers. The high street remains challenged by declining footfall, while the internet continues to post high, albeit declining, growth rates.
Brexit continues to cause disruption in the sector, with many retailers beginning to implement their "no deal" contingency plans. Animal specialist, Pets at Home, recently announced plans to increase its inventory holdings by up to £8 million, while fashion retailer Joules has begun the process of establishing a third-party distribution hub in the European Union.
Overall the picture for December was strong, but certain sectors fared better than others. Household goods were again the clear winner, posting value and volume growth of 10.1% and 9.2%, respectively. Other stores meanwhile had a surprisingly poor month with its first decline since June 2018.
The UK economy continued to follow the trends seen throughout 2018 with real regular pay growth increasing at its fastest rate since the 2016 referendum, driven by record vacancies and unemployment remaining at the historic low of 4.0%. Footfall continued to fall year-on-year despite heavy discounting by many high street retailers.
As we head closer towards 29 March 2019, the retail sector will desperately be hoping for greater clarity on the UK's future trading relationship with the European Union.
UK unemployment remained at a 43-year low of 4.0% whilst competition for workers has driven the annual growth in regular pay to 3.3%, excluding bonuses, over the three months ending in November compared to the same period last year. The number of job vacancies rose by 10,000 to a new record high of 853,000 in December.
The tightening UK labour market, along with lower inflation, resulted in regular pay increasing by 1.1% in real terms—the largest increase since the 2016 Brexit referendum. UK retailers are hoping that the increase in disposable income will result in greater consumer demand over the coming months.
Andrew Wishart, consultant at Capital Economics, commented that "households remain well placed to increase spending if and when the Brexit handbrake is released".
With a weak flow of new lending, the Bank of England reported that unsecured consumer borrowing increased by only £187 million in December to £215.6 billion. The 4.0% increase, in comparison to a 4.4% increase in November, shows that UK consumer borrowing continues to slow sharply.
With household spending accounting for approximately 60% of the UK economy, weakening consumer borrowing, along with uncertainty around Brexit, could point towards low economic growth in 2019.
Reflecting this, the Bank of England recently reduced its economic growth forecast for 2019 by 0.5% to 1.2% for the year—warning of a one in four chance of the UK economy falling into a recession.
After suffering the worst fall in almost a decade in November, footfall continued to deteriorate in December, falling by 3.1% in comparison to the prior year.
The South East and Yorkshire & the Humber proved to be worst affected by footfall declines in December, seeing a 5.5% drop compared with December 2017. The South West & Wales were the month's best performer, seeing just a 1.1% decline in footfall.
December marked the third year of decline, showing that retailers can no longer rely on Christmas trading to compensate for lost sales in the remaining portion of the year. Boxing Day is also proving to be a less significant physical trading day than it previously was, with footfall declining by 3.1% in comparison to Boxing Day in the prior year.
Nationwide reported house price growth of 0.5% in December when compared to the same month in the prior year—the lowest growth rate since February 2013. The average UK house is now worth £212,281.
The UK property market has softened considerably since 2017, as the increasing risks surrounding Brexit continue to dent consumer confidence and appetite for new property. As we move into 2019, this trend looks set to continue until the UK's future trading relationship with the European Union becomes clearer.