UK Retail Industry Sees Unexpected Growth as Consumers Slowly Return to Spending

British retail sales saw an unexpected rise of 1% in February, beating expectations. While the figure is slightly lower than January’s increase of 1.4%, it marks the second consecutive month of expansion, with growth being driven by an increase in spending at clothing and household goods stores.

In 2024, real income growth rose by 4.2%, which is the strongest growth in 9 years. However, this did not translate into consumer spending, which only saw minimal growth. As households prioritised saving over spending, the proportion of household income that is saved increased to 12% in the final quarter of 2024, which is the highest recorded level since the pandemic. Consequently, in the final quarter of 2024, UK retail spending growth was minimal and was below the rate of inflation, implying that consumers continued to reduce the amount of goods they purchased, like they have done throughout the cost-of-living crisis. In what is usually the busiest time of year for retailers, consumers remained cautious.

Conversely, in the three months preceding February, retail sales rose by 0.3% in comparison to the previous three-month period. One of the key factors influencing retails sales may be the strong wage growth over the past 18 months, which could now be translating to retail sales.

Certain retail categories have been performing significantly better than others. Household goods stores saw the largest growth in retail sales with 6.8% month-on-month – their largest increase since April 2021.  Watches and jewellery retailers also had an increase in demand, which may be due to economic uncertainty driving an interest in gold. Furthermore, online retail had a rebound in February with online spending values increasing by 3.3%, and the proportion of total retail sales conducted online rising from 25.8% in January to 26.5% in February. This is in contrast with this retail category’s weak start to the year.

However, according to the Office for National Statistics, food store sales volumes declined by 2% in February, following a strong rise of 4.8% in January. Supermarkets have seen the largest decrease in contribution to overall sales, largely due to factors such as increasing prices. This indicates that supermarkets are still facing challenges in maintaining customer demand.

In conclusion, the retail industry’s growth in the first couple of months of this year suggests a shift in consumer behaviour, with certain categories such as household goods and online retail leading the way. If wage growth continues, retail sales could increase further, however, the continued caution of consumers suggests that retailers may be compelled to adapt their strategies to attract consumers in this economic environment.