Given the importance of retail sales to western economies, it’s little wonder that this is a widely viewed metric among business owners and investors alike. Worryingly, retail sales have also become the latest victims of the mounting cost of living crisis in the UK, with inflation having peaked at a 40-year high of 9% as recently as April.

But what’s the precise outlook for retail sales in the UK, and why is this metric so important to the health of the region’s economy?

How are retail sales faring in the UK?

Inflation initially peaked at a 30-year high of 6.2% in February, before hitting 7% in March and reaching their highest level since 1982 last month. The recent rise to 9% in April also precipitated a sustained slump in retail sales, as discretionary spending diminished and households were compelled to curb their spending overall.

According to the latest figures from the Confederation of British Industry (CBI), retailers experienced a rapid and considerable decline in sales volumes through April, with this linked to the massive energy price cap hike rolled out during the same month. More specifically, April saw a record increase in global gas sales prices translate into an energy price cap rise of 54%. This affected 22 million households in the UK, equating to an average increase of £693 per annum through 2022.

Overall, the recent cost of living crisis represents the worst squeeze on household finances since the 1950s, and as consumer spending (and confidence) begins to depreciate sharply retail sales will bear the brunt of this downturn.

The decline in April was felt most keenly by clothing outlets and specialist food and drink stores, with premium and high-end entities particularly adversely affected.

Why is this bad news for the UK economy?

While there are many factors that contribute to economic growth in the UK, retail sales provide a deceptively important example. Consumer spending drives much of the national economy, and supports countless jobs in the production, distribution and sale of selected products.

To understand this further, let’s take a look at how customers spend their money. From clothing and footwear (which accounts for £23.50 of the capital spent by households each month) to recreation and food and non-alcoholic drinks, the British public continues to invest most of their money into the diverse retail space.

During times of high employment, economic growth and manageable inflation (below the central bank’s target of 2%), customers are encouraged to spend more in the retail sector. This drives further economic growth and reinvestment, translating into sustained and increased demand that eventually sees businesses expand and maximise production.

This creates a cycle of growth over time, and one that can significantly boost GDP and economic performance.

But what happens if customers are having their finances squeezed and feel uncertain about their fiscal futures? In this case, the public tend to save more and spend considerably less, gradually reducing the amount reinvested into the national economy and negatively impacting GDP.

Over time, this begins to have an effect on the growth and performance of individual businesses and market sectors, as companies see their revenues decline and profit margins depreciate.

Another issue here is that the Bank of England (BoE) is looking to curb rampant inflation by hiking the base interest rate. The BoE has initiated four such hikes in five months since December, with the base rate now set at a 13-year high of 1%.

While it may ultimately be successful in lowering inflation, this will raise the cost of borrowing for both households and businesses in the short-term and potentially exacerbate the risk-averse spending outlook in the UK. 

How are investors faring?

The recent slump in UK retail sales, which show no real sign of abating anytime soon, is also bad news for some investors, especially those engaged in classic buy-and hold strategies.

Retails stocks are likely to see their earnings diminish through at least Q3 and at the same time, many will have to contend with increased operational and borrowing costs as the base rate soars, squeezing their margins at both ends and forcing some to face significant financial difficulty.

As profit margins fall, so too does investor demand and market sentiment. This will either encourage investors to proactively sell their stock holdings at a potentially discounted rate, or see them look elsewhere for less volatile stock options.

Either way, the decline in retail sales will create considerable disruption in the stock market and from the perspective of individual investors, and this will need to be factored in for the second half of 2022 at least.

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