According to a recent report by Capital Economics, consumer demand in the retail sector is projected to stay robust in the upcoming months despite tightening household budgets. The report identifies two key factors that will help sustain consumer spending: lockdown savings and the growing popularity of buy-now-pay-later services.
During the lockdown period, many households were able to accumulate savings due to reduced expenditures on activities like dining out and vacations. These savings are now being tapped into to support ongoing retail purchases. Furthermore, the emergence of buy-now-pay-later services has provided consumers with a flexible payment option, allowing them to make purchases without immediately paying the full amount. This has contributed to the resilience of retail demand.
Ruth Gregory, a senior UK economist at Capital Economics, points out that households are resorting to credit to “tide them over,” which is evident from the substantial increase in consumer credit observed in February. She also highlights that as employment and earnings continue to rise, some of the pressure on households’ real incomes will be relieved. This suggests that there is still potential for consumer spending to rise, even in the face of declining real incomes.
However, Gregory also cautions that if the strain on households’ real incomes persists over a prolonged period, it is more likely that consumers will adjust their spending habits. This could adversely impact retail demand in the long term.
The outlook for the retail sector in the coming months appears somewhat uncertain. The KPMG/Ipsos Retail Think Tank (RTT) predicts a deterioration in the sector’s health due to expected increases in costs for retailers. Factors such as the conflict in Ukraine and the implementation of lockdown measures in China are anticipated to lead to higher food prices, including wholesale food prices and fertiliser costs.
Despite these challenges, the retail sector has actually outperformed expectations in the first quarter of 2022. RTT members report that sales growth during this period exceeded projections, and the Retail Health Index remained stable at 75 points, equal to pre-pandemic levels. Moreover, footfall to physical retail stores has increased as consumers are eager to indulge themselves after two years of Covid-related restrictions.
In conclusion, while the retail sector may face some obstacles in the near future, the continued consumer spending fueled by lockdown savings and buy-now-pay-later services is expected to keep retail demand buoyant. Nevertheless, the long-term effects of declining real incomes on consumer behavior remain uncertain and could result in changes to spending patterns. Retailers will need to navigate these challenges and find ways to adapt in order to thrive in the evolving landscape.
Useful Links:
1. Bankrate.com: A website providing financial information and resources, including tips on budgeting and managing personal finances.
2. CNBC Retail: A section of CNBC’s website dedicated to news, analysis, and insights about the retail industry.
