The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits in the year ahead.
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 15 April to 22 June 2024.
- The Retail & Wholesale Business Confidence Index was the lowest of all industries in Q2 2024, after a decline from the previous quarter, while economy-wide confidence increased.
- There was a slight improvement in domestic sales and export growth this quarter, although growth rates remain below the sector’s respective historical averages and national growth.
- Marketplace competition and customer demand remain the most widespread challenges among Retail & Wholesale businesses.
- Employment growth was lower than any other sector, and although businesses expect an improvement over the following year, their growth forecast is among the lowest of all sectors.
- Input price inflation continued to ease, but labour cost growth is still outpacing the national average. Businesses expect growth in both indicators to slow over the next 12 months. Selling price growth also slowed, while profits growth improved.
- Capital investment growth fell slightly in Q2 2024, and this downward trajectory is expected to continue next year. R&D budget growth saw an uptick, outpacing the sector’s historical average.
Business confidence in the Retail & Wholesale sector
Viewing on a mobile device
For a detailed view of the charts, please rotate your device.
Sentiment in Retail & Wholesale declined slightly in Q2 2024 and the Business Confidence Index is now at +7.9 from +10.8 in the previous quarter. Although confidence is significantly above the historical average for the sector (+0.1), businesses in Retail & Wholesale are the least optimistic of all the sectors surveyed. The national average this quarter was more than double that of the sector, at +16.7.
However, despite relatively weak confidence, economic conditions continue to improve for Retail & Wholesale businesses, thanks to slowing inflation which supports consumer demand. Recent ONS retail sales data show both volume and value sales increased in May 2024, although this followed a slight downturn in April. Yet, it is understandable that businesses in the Retail & Wholesale sector remain cautious about prospective growth, considering how volatile the economy has been in the past couple of years and how vulnerable the sector can be to shocks. The latest CPI inflation data show downward contributions to inflation from most spending categories, with the largest effect coming from food and non-alcoholic beverages. However, this does not mean that prices are decreasing; rather, they are increasing at a slower rate than before. As a result, it may take time for household budgets to fully recover and for sustained growth in consumer spending to drive sales. However, retailers remain optimistic that the outlook for sales is positive.
Domestic sales growth and customer demand
Annual domestic sales growth recorded a slight uptick in Q2 2024 compared to the previous quarter. Domestic sales grew by 2.8%, but remain below the sector’s historical average of 3.0% and the national average of 3.3%. Given relatively weak sales it is not surprising that customer demand was cited as a growing challenge by 42% of businesses in the sector. Retailers are hopeful that falling interest rates will support sales growth in the coming year. Indeed, a large retailer recently claimed that they expect consumers to remain cautious until interest rates start to fall, with many commentators expecting the Bank of England to start lowering rates in August. Businesses in the sector now expect domestic sales growth to accelerate in the coming 12 months, to 5.1%, slightly below the national expected average of 5.3%.
Business challenges
Alongside customer demand, marketplace competition was the other significant issue facing the Retail & Wholesale sector, impacting 45% of surveyed businesses. This is no surprise considering the current economic conditions, as prices remain high (despite decelerating inflation), constraining consumers’ spending power and intensifying competition. Specifically, the share of businesses which mentioned marketplace competition as a growing issue has been growing almost consistently since the end of 2022, which corresponds to the rapid rise in inflation and the Bank of England’s move to rapidly raise interest rates in response.
Regulatory requirements are also widely cited (42%), increasing from the previous quarter and now above the historical average (35%). The sector is among other typically less-regulated sectors increasingly reporting regulations as a growing challenge. Specific to retail, these heightened concerns could be linked to the introduction of the Digital Markets Competition and Consumers Act 2024, designed to increase consumer protection online against factors such as fake reviews and drip pricing practices. Some Retailing & Wholesaling companies may also be dealing with new packaging rules impacting the reporting of data and the labelling of packaging.
Meanwhile, the new Labour Government has made several commitments to support the retail sector, including reforming business rates and higher flexibility on how to use apprenticeship levy subsidies to help tackle skill shortages. This tallies well with some of the other concerns for retailers and wholesalers. In Q2 2024, 24% of businesses in the sector reported taxes as a growing challenge, and staff turnover and availability of non-management skills were reported by 25% and 17% of companies respectively.
Labour market
Employment growth in Retail & Wholesale remains sluggish in Q2 2024, with a growth rate of 0.5%, a slight decline from the previous quarter (0.6%). In fact, Retail & Wholesale reported the slowest employment growth in Q2 2024, significantly below the national average of 1.8%. Employment growth was also below the sector’s historical average growth of 0.9%. While businesses expect employment expansion to return to the historical average over the next 12 months, this will be one of the lowest growth rates of all surveyed sectors.
Wage growth continued to accelerate in Q2 2024, at 3.9%, placing Retail & Wholesale above the national average of 3.7%. Indeed, several large employers in the retail sector have raised minimum hourly pay to above the National Living Wage which increased in April. There are also plans from the new government to change the way the National Living Wage is calculated, so that it also accounts for the cost of living. If implemented, this could place further upward pressure on wages in the retail sector, which tends to have a greater concentration of typically lower-paid positions. But further clarifications will be needed from the government, and at present Retail & Wholesale businesses expect the growth in salaries to ease in the next year to 2.4% - the lowest growth rate of all sectors.
Input and selling prices, and profits growth
The growth in input prices softened in Q2 2024 to 4.1%, compared to 4.4% in the previous quarter. Although this remains much higher than the sector’s historical norm (2.6%), the Retail & Wholesale sector benefits from one of the lowest input price growth rates of all sectors surveyed. Retail & Wholesale businesses are also the most optimistic that input price inflation will continue to fall, anticipating a much more modest increase of 1.8% in the year ahead, well below the expected national average of 2.7%.
Meanwhile, selling prices growth continued to decline, a trend now observed for the past four quarters. However, prices growth was reported at twice the historical average at 3.0%. In line with their expectations about input prices, businesses expect selling prices growth to continue on a downward trajectory, reaching 1.5% over the next year.
Encouragingly, profit growth continued to increase for the second successive quarter and achieved 2.3% in Q2 2024, in line with the historical average. This marks the first time in a year and a half that profit growth has achieved this rate. This suggests that growing sales and slowing inflation are enabling businesses to grow profits, despite challenges such as rising labour costs. As Retail & Wholesale businesses expect those conditions to further improve, they anticipate profit growth to accelerate in the next 12 months, to 4.7%. This is, however, below the profit growth expected by every sector other than Property.
Investment
Retail & Wholesale businesses reported a weakening in capital investment in Q2 2024. Although capital investment grew by 2.0% in Q2 2024 compared to 2.7% in the previous quarter, growth remained above the historical average of 1.7%. Capital investment expanded more slowly than the UK average (2.3%) however, and businesses plan to decelerate growth to 1.1% over the next 12 months.
R&D budgets continued to grow this quarter and outpaced the sector’s historical average. However, at 1.6%, it remained below the national average (1.9%). Companies plan to also curb growth in their R&D budgets to 1.2% next year, below most other sectors.
