British recession looms as Christmas retail sales slide

Policymakers at the Bank of England are closely watching the data to gauge when they can bring UK interest rates down from their highest level in 16 years.

British retail sales fell at their fastest pace since pandemic lockdowns three years ago, adding to the risk the UK economy slid into a shallow recession to end 2023.

The volume of goods sold fell 3.2% in December, the UK Office for National Statistics said, as households did their shopping earlier in the season and bought less sports equipment, games, watches and jewellery in the days immediately before Christmas. That was the worst reading since January 2021.

While retail sales make up only 5% of Britain’s economic output, the shortfall may be enough to tip the UK’s stagnant economy into a technical recession — or two consecutive quarters of negative growth — at the end of 2023.

“The UK economy has been dealt another disappointment this week with retailers reporting a contraction in sales,” Jon Boland, general manager of the payment processing company Clover in the UK. “This decline in a key sector will be a cause for concern for those hoping the UK economy will avoid a recession.” Sterling fell after yesterday’s release. Investors added to bets on Bank of England interest rate cuts, fully pricing in the first quarter-point reduction by June with at least three more to follow by the end of the year.

“December’s UK retail sales collapse adds to evidence that the UK probably slipped into a technical recession at the end of last year,” said Niraj Shah at Bloomberg Economics.

“Consumer spending appears to have been hit hard by the unseasonably wet weather in December, as well as sales being brought forward to November for the Black Friday sales.

“The pressure on consumer spending is likely to ease this year as wage growth continues to surpass inflation,” Mr Shah said.

The slowdown is further evidence that the Bank of England’s efforts to rein in both a red-hot labour market and inflationary pressures have had their desired effect. Policymakers at the central bank are closely watching the data to gauge when they can bring UK interest rates down from their highest level in 16 years.

Although a year-end recession looks more likely, several economists expect the situation to improve in 2024, as businesses and households benefit from rising wages, falling energy prices and declining borrowing costs.

There is also the potential for an upward adjustment to the initial estimates of retail sales. “The odds of an upward revision seem high,” said Martin Beck, an economist at EY Item Club, which uses the Treasury’s forecasting model.

“Food stores performed very poorly, with their steepest fall since May 2021 as early Christmas shopping led to slow December sales,” said Heather Bovill, deputy director for surveys and economic indicators at the ONS.

“Department stores, clothing shops and household goods retailers reported sluggish sales too as consumers spent less on Christmas gifts,” she said.

Bloomberg