What UK retail sales slump reveals about recession and interest rates

Retailers suffered their worst decline in sales in nearly two years in the run-up to Christmas, fuelling fears that the economy may have entered a shallow recession in the second half of 2023.

Retail sales volumes shrank 3.2% between December and November — the biggest drop since January 2021, according to the Office for National Statistics (ONS).

The ONS said people appeared to have done their Christmas shopping earlier than in previous years. On an annual basis, sales volumes fell by 2.8% in 2023 and were at their lowest level since 2018.

The fall makes it more likely that the economy was in negative territory over the fourth quarter of the year. GDP fell by 0.1% in the third quarter followed by a monthly drop of 0.3% in October and a 0.3% bounce in November.

Retail sales are likely to subtract 0.04 percentage points from British economic output in the fourth quarter, the ONS said.

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A recession is typically defined as two three-month periods — or quarters — in a row of shrinking economic output.

Capital Economics assistant economist Alex Kerr said the weak figures “increases the chances the economy may have ended 2023 in the mildest of mild recessions”.

Charles Hepworth, investment director at GAM Investments, said: "Alarmingly, UK retail sales collapsed in December in what should have been a robust trading period.

“A double bubble of bad news this week for the UK as with inflation tracking up again and consumers pulling back on purchases, this will only add to concerns that the economy is probably already in a recession. This is in stark contrast to the picture on the other side of the Atlantic, with US consumers still ebullient."

The retail slump is pushing the property sector to call for interest rate cuts to save the economy.

Elliott Culley, director at Switch Mortgage Finance, said: “Income is being stretched to breaking point and the Bank of England needs to think carefully on how to respond and not be blinded by a slight uptick in inflation earlier this week.”

Justin Moy, managing director at EHF Mortgages, added: If there was any doubt about the state of our economy, this appalling data has removed it.

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“The economy is hanging on by a thread. These figures highlight the plight of both consumers and the hundreds of thousands of retail businesses that are under frankly relentless pressure.

“Whilst this is terrible news, the only positive is that this should encourage the Bank of England to cut rates sooner, and that will likely apply downward pressure on SWAP rates to fall, reducing mortgage costs overall.”

Economists and financial markets had forecast that the Bank of England will cut interest rates this year, possibly in the spring.

Roger Jones, head of equities at London & Capital, said: "The Bank of England will become increasingly of the view that the economy is slowing quite dramatically and they need to start easing rates.Inflation does look like it will continue in a downward path despite the data earlier showing a small tick-up.

"In terms of the timing, we’re speaking Q2 when the bank will probably be arm-twisted to start cutting rates."

However, the recent inflation figures suggest that a cut may not be made until June. Interest rates are currently at 5.25%.

Watch: UK retail sales slump points to recession risk

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