Economic uncertainty to test shopper demand in 2018

The economic performance of 2017 was better than many had expected. GDP is on course for annual growth of around 1.4%, unemployment is low and consumer confidence has proved fairly resilient. Despite uncertainty and ongoing shifts in channels of distribution, total retail sales for 2017 increased in both volume and value terms.

That said, inflation tested shoppers and retailers alike, with the resulting fall in people’s real incomes presenting financial challenges for many households and fuelling higher levels of borrowing.

As we kick off 2018 the economic outlook is difficult to predict, especially given the lack of clarity surrounding the nature of the UK’s future relationship with the EU. However, there are some key indicators that offer us some clues which can help us understand the shape of the year ahead for shoppers.

First, the rate of inflation is likely to ease now that the inflationary impact of sterling’s fall following the EU referendum has now largely fed through into shop prices. This should relieve pressure on household finances, with real incomes expected to start increasing in the second half of the year.

Second, while we can’t rule out another interest rate rise in 2018, it is unlikely to be greater than half a percentage point in total. The cost of servicing debt is therefore probably not going to increase significantly, though it does mean savers cannot expect much of an increase in interest income. If interest rates do rise more rapidly, however, it would squeeze household finances and knock consumer confidence.

Finally, and perhaps the source of most concern for retailers, is the increasing level of household debt we’ve seen over recent years. Much of the growth in consumer spending in 2017 was fuelled by credit cards and other loans. We expect debt-burdened shoppers will be more cautious this year as they try to manage borrowing. Big ticket items are likely to take the biggest hit, as shoppers defer these expensive purchases.

We expect that together, these factors will result in a continual but steady decline in consumer confidence throughout 2018, following on the trend of the past couple of years.

Overall, the year will be characterised by uncertainty for both shoppers and retailers. We expect a more challenging economic climate will test weaker retailers. Unfortunately, casualties and space rationalisation seem inevitable.

 

This article is an extract from Savvy’s Themes and Outlook for 2018 report. At the start of each year, Savvy speaks to its panel of 1,000 UK grocery shoppers to understand their views, attitudes and opinions. Our insight team then analyses the data and considers the key issues that are set to influence the market. In the report we present our view on the shopper landscape and highlight the key themes which we expect to shape the agenda in 2018. To receive the full report please contact Taj Sur.