The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.
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 January to 22 March 2024.
- The Retail & Wholesale Business Confidence Index increased and moved firmly into positive territory in Q1 2024, following a marginally negative reading in the previous quarter.
- Domestic sales growth was sustained and remained unchanged in Q4 2024, but the Retail & Wholesale sector underperformed the sector-wide average.
- Customer demand and marketplace competition are the most widespread challenges among Retail & Wholesale companies, as inflation has squeezed consumer spending and increased competition among retailers.
- Employment growth returned this quarter but remained lower than any other sector. Although businesses are slightly more optimistic about the next 12 months, their employment growth forecast is among the lowest of all sectors.
- Input price inflation remains high by historical standards, but businesses are optimistic that inflation will continue to slow in the year ahead, supporting increased profits growth. Selling price inflation continued to ease in Q1 2024. Retail & Wholesale companies expect to see a smaller increase in prices in the coming year compared to the national average.
- Growth in capital investment and R&D budgets in the Retail & Wholesale sector is weak and companies do not plan to scale-up investment in the year ahead.
Business confidence in the Retail & Wholesale sector
Sentiment in Retail & Wholesale improved significantly in Q1 2024, and the Business Confidence Index is now at +10.8, from -0.3 in the previous quarter. This is the highest level since Q1 2022, which marked the beginning of a sharp fall in confidence and is above the historical average for the sector (0.0). But although Retail & Wholesale businesses are starting to feel more optimistic, the situation remains comparatively fragile in the industry, and the index is lower than in several other sectors, as well as the national average (+14.4).
The progressive slowdown of inflation has provided consumers with increased spending power, easing the pressure for businesses in the Retail & Wholesale sector and allowing sales volumes to grow. The most recent ONS retail sales data shows both volume and value sales increased in January and remained flat in February. But more recent data from the British Retail Consortium suggests another surge in sales value in March 2024, largely driven by food purchases. This offers an encouraging outlook for the Retail & Wholesale sector, despite fragile consumer confidence. Recent credit card data from Barclays still shows low levels of spending growth, which might have been partially driven by the poor weather, but could also reflect consumers’ cautiousness after two years of difficult economic conditions.
Domestic sales growth and customer demand
Annual domestic sales growth remained unchanged in Q1 2024 compared to the previous quarter, with recorded growth of 2.4%. Although trading conditions have improved, largely as a result of decelerating inflation, prices remain high and continue to squeeze household incomes. But the outlook is more encouraging and in the next 12 months, Retail & Wholesale businesses anticipate domestic sales to accelerate to 4.6%, which would outpace the sector’s historical average of 3.0%.
Unsurprisingly, customer demand continues to be the most widespread challenge reported by the Retail & Wholesale sector, and almost half (46%) of businesses cited it as a growing issue in Q1 2024, a similar proportion to the previous quarter, and slightly above the historical average of 44%. Indeed, Businesses in Retail & Wholesale are more likely than those in other sectors to cite customer demand as a growing concern.
Business challenges
While customer demand is by far the most widespread challenge among Retail & Wholesale companies, marketplace competition follows with 37% of businesses reporting it as a growing issue in Q1 2024, a greater proportion than in any other sector. The squeeze in household budgets has made consumers increasingly price-sensitive and increased competition among retailers. Indeed, one of the largest supermarket chains recently reported that they have reduced the prices of a wide array of their products to compete with discount retail chains and protect market share.
Elsewhere, regulatory requirements continue to be a significant issue for Retail & Wholesale businesses, cited as a growing obstacle by 34% of businesses, and concerns about the tax burden remain high. However, overall, Retail & Wholesale businesses seem to be less preoccupied with financial challenges and the proportion of businesses reporting bank charges, alongside those reporting issues accessing capital, are around their historical averages for the sector.
Labour market
Employment growth in Retail & Wholesale recovered somewhat in Q1 2024, after a significant slowdown in the previous quarter. However, at 0.6%, the pace of growth remains below the sector’s historical average (0.9%) and the national average (2.0%). Businesses plan to increase employment in the year ahead, but employment growth will remain relatively mild at 1.1%, below the expectations of every other sector apart from Transport & Storage.
Most sectors have either seen a drop or stabilisation in salary growth in Q1 2024. However, there was an uptick in Retail & Wholesale, rising to 3.4% from 3.1% in Q4 2023, after two quarters of deceleration. This is consistent with news that some major retailers recently raised minimum pay for staff as supermarkets battle to retain workers and ahead of the increase in the National Living Wage in April 2024. Another challenge for the sector, likely related to pay, is staff turnover. Having eased as a concern, the proportion of businesses reporting the issue increased in the last two quarters and is now around twice the pre-pandemic average. These factors are likely feeding into employers’ salary expectations, with only a marginal decline in pay growth expected next year, to 3.2%.
Input and selling prices, and profits growth
The rise in input prices in the Retail & Wholesale sector peaked in Q3 2023, at which point they were growing by 6.3%. Input price growth has eased considerably since, and in Q1 2024 growth was at 4.4%. Although this remains high by historical standards for the sector (2.6%), it is slower than the national average recorded this quarter (4.7%). Businesses in Retail & Wholesale are also the most optimistic for the year ahead and input prices are expected to grow by 2.3% in the next 12 months, the lowest expected rate of all sectors.
Selling price inflation in Retail & Wholesale continued to soften in the year to Q1 2024 as businesses increased their prices by 3.3%, a similar rate to the UK average (3.2%). Despite this easing, price growth was still over double the sector’s historical average (1.5%). Looking ahead, companies within the sector envision further moderation, expecting to raise prices by 2.0% in the coming year. Only Banking, Finance & Insurance anticipate lower price rises during this period.
Profits growth has fluctuated in the last few quarters, but the annual growth rate of 1.4% in Q1 2024 was below the historical average for the sector (2.3%). Companies anticipate profits growth will accelerate to 4.3% in the next 12 months, boosted by softening inflationary pressures and growing sales. But these expectations are below most other sectors for the year ahead, highlighting that businesses remain cautious given the various challenges facing the sector.
Investment
Investment in Retail & Wholesale rose in Q1 2024, following two quarters of subdued activity. Capital investment grew by 2.7% compared to 0.9% in Q4 2023, outperforming the sector’s historical average (1.7%) and the national average for this quarter (2.3%). Yet companies are not planning significant growth in capital investment in the year ahead, with anticipated growth of just 0.3%, by far the lowest expectation of all sectors.
The weak growth in R&D budgets reported in the sector recently is set to continue in the coming year. Companies do not plan to increase their R&D budgets following growth of just 0.6% in the last two quarters. This expectation is below the historical average growth for the sector (1.4%) and the weakest outlook of all sectors.
