It had all been going swimmingly for the UK retail sector. In November all the signs pointed to a buoyant Christmas period and recovery at last for the previously lacklustre high street. Then Omicron hit and shoppers stayed home. The most recent data shows retail sales slumped in December. Is this curtains for UK economic growth?

Monthly retail sales slid 3.7% between November and December, according to the Office for National Statistics. Economists had forecast a decline of just 0.6%. Areas of particular weakness included fuel, furniture and clothing. It is worth noting that this is still 2.1% higher than in December 2021, but that month had also been disrupted by the pandemic.

Does this matter? Potentially, yes. One of the strongest arguments for further economic growth in 2022 has been the ‘pent-up’ spending argument. For example, in June of last year, a survey by Scottish Friendly and the Centre for Economics and Business Research forecast that the release of lockdown savings would bring more than £50bn in additional spending.

A more recent survey from Quilter and YouGov found that many people are now delaying major purchases, such as foreign holidays. The Omicron variant and cost of living squeeze are pushing people to ‘wait and see’.

This is understandable. Households can see some pain ahead: Jonathan Gillham, chief economist at PwC, says: “There are already signs that growth will become increasingly sluggish through 2022-3, as base effects fall out of the annual figures while consumers and sectors struggle with rising costs and supply chain bottlenecks.

There is a danger than many of these pent-up savings go to support higher energy bills and day-to-day living costs rather than generating real growth in the economy.

Will this constrain UK economic recovery?

The retail sector is not, of itself, a huge part of the UK economy. The British Retail Consortium puts it at around 5% of the UK’s GDP. However, it is the largest private sector employer, so any weakness could have an impact on employment. Retail sales also tend to be a leading indicator of consumer confidence and therefore, of GDP growth.

The UK economy had been struggling in the second half of 2021, but finally surpassed pre-Covid levels in November, rising 0.9% year on year. Buoyant retail spending proved to be a significant part of this bounce. However, economists now suggest this might prove a high point as Omicron not only knocks spending, but also exacerbates worker shortages.

Bethany Beckett, an economist at Capital Economics, for example, suggests that the UK economy may have shrunk by 0.5% in December. While she predicts retail sales will probably recover during January, February and March, the cost of living crisis will continue to weaken the consumer recovery.

Danni Hewson, financial analyst at AJ Bell, said: “It’s impossible not to look at this latest set of figures and not feel a sense of inevitability. December will have dragged the economy backwards; the question is by how much? Which sectors will have been able to push through the latest restrictions? Which will have been impacted by worker illness or dwindling consumer confidence?

Resilience

Stronger retail sales would be a ‘nice to have’, but other segments of the UK economy are doing well and may, ultimately, cushion this weakness. In its latest PMI analysis, IHS Markit says a strengthening expansion of business services activity is helping offset a steep downturn in activity in consumer-facing sectors amid the Omicron wave. It adds: “Many business and financial services companies have meanwhile been far less affected by Omicron, and saw business growth accelerate at the start of the year. Business confidence in the outlook also picked up, driving sustained solid jobs growth.

Its latest data suggests that the growth of business-to-business services is accelerating at its fastest pace since last July, with financial services activity also picking up strongly, offsetting weakness elsewhere. Manufacturing output growth is also ticking higher as supply constrains ease.

Those hoping for a boost to the UK economy from pent-up consumer spending may have longer to wait. Consumer confidence is still thin on the ground and people are hanging on to their pandemic savings for now. However, there are other parts of the UK economy that can pick up the slack for the UK consumer in the meantime.

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This article was sourced from Adviser-Hub.co.uk.