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Economic Insight

UK Business Confidence Monitor: Retail & Wholesale

Q4: Business Confidence Index dips into negative territory

The latest national Business Confidence Monitor (BCM) for Q4 2023 shows a slight shift in sentiment within the quarter. However, the quarter-on-quarter improvement in sentiment is marginal, remaining broadly steady at a similar level over the last few quarters. Overall confidence continues to fall short of the pre-pandemic average.

The survey results are based on 1,000 telephone interviews among ICAEW Chartered.

Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 17 October to 15 December 2023.

  • The Retail & Wholesale Business Confidence Index declined and is now marginally in negative territory, and sentiment is likely to be fragile.
  • Growth in domestic sales has been weak compared to the historical average, but companies expect a significant improvement in the year ahead.
  • Alongside issues over customer demand, regulatory requirements also remain prevalent and concerns over competition in the marketplace, financial challenges and the tax burden are rising.
  • Employment growth stalled but the pace of increase is expected to increase in the next 12 months, while the current high rate of salary growth is forecast to be maintained.
  • Input price inflation has eased but has weighed on profits growth, though companies expect the rate to improve in the coming year as inflationary pressures ease and sales pick up.
  • Given the challenging landscape, capital investment and R&D budgets in the Retail & Wholesale sector are subdued and prospects are downbeat.

Business confidence in the Retail & Wholesale sector

Sentiment in Retail & Wholesale fell in Q4 2023, with the Business Confidence Index now at -0.3, down from +5.1 in the previous quarter. Confidence in the sector was high throughout 2021 before it slumped in Q2 2022 and, while it recovered somewhat in 2023, it is clearly fragile and companies in this sector are among the most downbeat. Indeed, confidence is lower in only two sectors (Energy, Water & Mining and Business Services).

The fall in confidence followed a particularly difficult period for businesses in Retail & Wholesale. High interest rates and strained household budgets are likely weighing on demand and recent retail sales data paints a rather mixed picture for the end of 2023. There were headlines suggesting that retailers experienced strong sales growth in November ahead of the key Christmas period, with ONS reporting that retail sales volumes increased by 1.3% between October and November. The picture remained encouraging when, shortly after Christmas, supermarkets were widely reported to have enjoyed strong grocery sales performance, with sales of festive food helping drive demand. However, the recently-published ONS retail sales figures for December show a 3.2% decline compared to November. This marked the largest monthly fall since January 2021. Sales volumes fell across the board, including sales of food, non-food and fuel.

However, household budgets improved during the final quarter of 2023, with a sharp fall in the rate of inflation in November and continued growth in pay, boosting real incomes. It is also now increasingly likely that interest rates might be at their peak. These factors, alongside the prospect of interest rate cuts in the near term, may have prevented confidence in the sector from falling further.

Domestic sales growth and customer demand

Annual domestic sales growth in the Retail & Wholesale sector resumed its downward trend in Q4 2023, having temporarily improved in the previous quarter. Despite recent improvements, elevated prices continue squeezing discretionary household spend and customer demand. Indeed, at 2.4% in the year to Q4 2023, domestic sales growth was weak compared to the sector’s historical norm and is joint-slowest in the UK, alongside Property. However, Retail & Wholesale businesses anticipate the rate of increase will accelerate to 4.7% in the coming year, broadly tracking the predicted rate for the UK (4.9%).

Amid the challenging backdrop, it is unsurprising that customer demand continues to be the most widespread growing challenge for businesses in the Retail & Wholesale sector. Indeed, 47% of companies in the sector flagged it as an increasing issue in Q4 2023, just ahead of the historical average for the sector (44%). However, only in the Construction sector is customer demand a more prevalent rising challenge (48%).

Business challenges

Alongside concerns over customer demand, regulatory requirements remain prevalent, with 38% of businesses citing it as a growing obstacle in Q4 2023. The issue has risen sharply in the last two quarters, from 23% in Q2 2023 to the current level, which is just above the historical average of 34%.

Marketplace competition has re-emerged as an issue for Retail & Wholesale businesses. It has been a feature over the last decade, likely a result of rising online competition and structural changes within the industry but, having eased in Q3 2020 to 23%, it has since risen, and 34% of businesses in the sector flag it as an increasing difficulty in Q4 2023, edging closer to the sector’s historical norm (40%).

There is some evidence that financial challenges are growing in the Retail & Wholesale sector, albeit from a relatively low base. One in five businesses (20%) reported bank charges as a growing issue in Q4 2023, up from 13% in Q1 2023. Indeed, the proportion of companies in the sector reporting bank charges is broadly in line with the economy-wide average, but it is notably ahead of the sector’s historical norm. A similar trend for access to capital is apparent, rising from 10% in Q1 2023 to 18% in Q4 2023. Meanwhile the tax burden has been steadily rising as a concern over the past year and, at 22% in Q4 2023, is above the historic norm for the sector (15%).

Labour market

Employment growth in the sector was relatively strong through 2022 and most of 2023, but the rate of increase plummeted in the year to Q4 2023, achieving minimal growth of just 0.1%. This is considerably below the already muted historical average of 0.9% and is slower than any other sector in the UK. Companies in the sector do, however, anticipate raising their staff levels by 1.4% in the next 12 months, marking a vast improvement compared to the current rate. Still, the predicted rate of growth for the sector somewhat trails the national average (1.8%). Factors like the higher National Living Wage scheduled in April 2024 could be impacting the recruitment outlook for some companies, particularly those with a higher proportion of lower-paid workers, which are more common in sectors like Retail & Wholesale.

Salary growth in Retail & Wholesale has been on a rising trajectory since 2021, but in the last quarter the pace of increase has been slower than in any other sector, likely reflecting, in part, muted employment increases. But at 3.1% year-on-year in Q4 2023, it is markedly faster than the sector’s historical norm (1.9%), and companies expect growth to remain at around current rates in the coming year. This outlook may be influenced, in part, by the upcoming increase in the National Living Wage in April 2024. One major retailer recently raised the minimum pay for staff amid news that supermarkets are battling to retain workers.

Input and selling prices, and profits growth

Businesses in the Retail & Wholesale sector are still battling rising input costs, though the pace of increase has eased considerably in the latest quarter. That said, annual input price inflation remains high by historical standards for the sector and, at 4.3% in Q4 2023, it is notably faster than the sector’s historical average, though slower than any other sector. Businesses expect the rate to moderate further, to 2.8%, over the coming year, broadly mirroring the predicted average rate for the UK.  Easing input price inflation is reflected in selling prices in the sector, with businesses reducing the rate of increases in Q4 2023 to 3.5%, down from 4.5% in the previous quarter.

Elevated input prices in the sector are straining profits growth, which has been on a downward trend since early 2022. The pace of increase has eased once more in the year to Q4 2023 and, at 0.6%, profits growth has largely stagnated. Companies anticipate a sharp uplift in performance over the next year as inflationary pressures subside and sales pick up, with growth forecast to reach 4.6%. This is double the pace of the sector’s historical norm and aligns with the predicted national rate.

Investment

Investment rates remain subdued in Retail & Wholesale given the various financial challenges within the sector and the overall weakness in sentiment. Growth in capital investment spending was largely stable through 2022 and has since eased and, at 0.9% in the year to Q4 2023, it is among the weaker rates of uplift across sectors in the UK. Companies plan to raise their capital investment spending by a similar rate in the coming year.

While companies are lifting their R&D budgets at 0.6% in the year to Q4 2023, it is the weakest across sectors and less than half the sector’s historical norm (1.4%). The outlook is even less optimistic as companies do not intend to raise R&D budgets over the next 12 months.

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