Q4: Sentiment among Retailers & Wholesalers drops to lowest level in two years.
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 14 October to 13 December 2024.
- The Retail & Wholesale Business Confidence Index slumped into negative territory and to the lowest level in two years amid concerns about the tax burden and sluggish sales growth.
- Domestic sales growth slowed significantly to just 1.1%, lagging the historical and national average, but businesses remain optimistic that sales will improve in the year ahead.
- Customer demand is the most cited business challenge but concerns about the tax burden and regulation have risen.
- Input price inflation continues to ease but businesses expect a slower decline in prices over the coming year than reported last quarter.
- Employment growth remains lower than most other sectors and the outlook is also weak.
- Capital investment growth slowed over the course of 2024, but businesses plan to maintain growth broadly in line with the historical average, while R&D prospects are set to deteriorate further.
Business confidence in the Retail & Wholesale sector
Confidence fell sharply in the Retail & Wholesale sector in Q4 2024 as businesses grappled with weaker sales growth and began to assess the likely impact of the tax and National Living Wage rises announced in the Autumn Budget on their prospects for the year ahead. The Business Confidence Index dropped from +12.1 in Q3 2024 to -6.2 in Q4 2024, the weakest reading across all sectors surveyed, and below both the national average (+0.2) and the sector’s historical average (+0.1). The fall means that confidence in the sector is at its lowest level since Q4 2022.
Businesses in the sector were relatively upbeat in the previous quarter, as ONS statistics showed that retail sales volumes rose in the summer. However, the latest ONS figures provide somewhat mixed news. It was certainly positive that sales volumes in Q4 2024 were up on the same period a year before and overall retail sales grew in 2024 compared to 2023, following year-on-year decline in both 2023 and 2022. However, the data (which is seasonally adjusted and accounts for Black Friday sales) also showed that sales volumes fell by 0.8% in Q4 2024 compared with Q3 2024, marking a disappointing end to the year. The Bank of England Agents’ Summary of Business Conditions stated that sector contacts were puzzled by the lacklustre growth at the end of 2024, given the improvement in real incomes, and reported that consumer confidence remained weak.
While consumer incomes should continue to improve over the coming year, retailers have voiced concerns that measures announced in the Autumn Budget, including higher employer national insurance contributions and an uplift in the National Living Wage, will impact prospects for the sector. In particular, they warn that the increased costs could be passed on to consumers, with the British Retail Consortium forecasting that food price inflation would rise from 1.8% in December to 4.2% in the latter half of 2025.
Domestic sales growth and customer demand
Domestic sales growth in Retail & Wholesale eased significantly in Q4 2024, slowing to 1.1% from 2.8% in the previous quarter. The figure in Q4 2024 is notably weaker than the sector’s historical average (2.9%) and the UK average in the quarter (3.2%). In fact, it was the weakest performance recorded across all sectors apart from Manufacturing & Engineering (1.0%). However, businesses expect sales to pick up over the next 12 months to 4.2%, but this is weaker than the economy-wide projection (4.9%) and most other sectors.
Business challenges
With sales growth appearing to tail off in Q4 2024, Retailers & Wholesalers continue to be highly concerned about customer demand. Just over half (51%) of businesses in the sector cited the issue as a growing challenge, a larger proportion than reported in any other sector and above the historical average of 44%. Competition in the marketplace also remains a significant concern, reported by 40% of companies in Retail & Wholesale in Q4 2024, matching the historical average and a greater worry than in most other sectors.
However, following the tax rises announced in the Autumn Budget, anxieties about the tax burden rose sharply and were reported by 42% of companies in the sector, the highest proportion since the start of the survey and the joint-second greatest concern alongside regulatory requirements. Indeed, the proportion of businesses citing regulatory issues has been trending up since late 2022 and, at 42%, is the highest it has been since Q1 2021.
Labour market
Employment growth softened in Q4 2024 to 0.9%, down from 1.1% reported in the previous quarter but consistent with the historical average. The result suggests that growth in the sector continues to lag behind the national average (1.7%) and most other sectors. Retailers have been particularly vocal about the potential combined impact of increases to the National Living Wage and business taxes announced in the Budget on employment prospects in the sector. This is perhaps evident in the survey responses in Q4, with businesses expecting growth to continue at 0.9% next year, the lowest growth projection across all sectors, apart from Transport & Storage (0.5%), and lower than projected last quarter (1.6%).
The latest survey results show that while wage inflation continues to ease, it remains high. At 3.3% in Q4 2024, salary growth in the sector was above the economy-wide average (3.1%). Despite concerns about the impact of the Budget on employment costs, companies continue to expect salary inflation will slow over the coming 12 months, projecting growth of 2.7%, consistent with the national average but above the sector norm (2.0%). Businesses in the sector appeared to be much less concerned about skills availability this quarter but staff turnover, though easing a little, was a growing issue for 21% of businesses in Q4 2024, above the sector historical average of 18%.
Input and selling prices, and profits growth
Input price inflation in the Retail & Wholesale sector slowed to 3.2% in Q4 2024, below the national average (3.7%). Input price inflation continues to trend downwards since its historical high in Q3 2023, and this is expected to continue as businesses anticipate the rate will slow further to 2.3% over the next 12 months, dipping below its historical average (2.6%). However, the projection is higher than reported last quarter, suggesting that businesses have revised their expectations about the pace of inflation for the year ahead.
The growth in selling prices had been following a similar trend, but ticked up in Q4 2024, with growth rising to 2.9% from 2.4% in the previous quarter, and one of the highest rates reported across all sectors. However, the downward trend is expected to return, with selling price growth predicted to ease to 2.1% over the next 12 months.
Profits growth picked up in Q4 2024, rising to 1.6% from just 0.6% reported in Q3 2024. However, this was the weakest growth across all sectors in the survey. Businesses anticipate a considerable improvement, forecasting profits growth will accelerate to 4.4% over the next 12 months and above the sector’s historical average (2.3%). However, this expectation is somewhat weaker than the economy-wide projection (5.0%).
Investment
Capital investment growth trended down over the course of 2024 and, at 1.6% in Q4, dipped below the sector norm (1.7%). However, businesses plan to maintain capital expenditure growth next year at 1.6%, only marginally lower than the national average (1.8%), though lagging most sectors.
R&D budget growth has also been easing and in Q4 2024, Retail & Wholesale recorded the lowest rate of growth across all sectors at just 0.5%. The outlook is somewhat pessimistic, with companies planning to reduce growth further to just 0.3% in the year ahead. This is lower than expected in any other sector and significantly lower than the sector’s historical average (1.4%).