Follow Us On Twitter
Newark Beacon Innovation Centre, Cafferata Way, Newark NG24 2TN - telephone: 0845 122 7058 (Int: +44 84 51 22 70 58) - e-mail:
Retail Forecast for 2010-2012
Tell a friend about this page.

The Retail Forecast for 2015-2016
From the Centre for Retail Research

"It's time you were competitive like Britain, Osborne tells European elite"
(Speech by Rt Hon George Osborne, Chancellor of the Exchequer at Davos [Evans-Pritchard, 2015])

[As at 26 Jan 2015]

What if Politicians get it wrong?

The Forecast: No Man is An Island, nor Economy
You do not find the studious types at the Centre for Retail Research engaging in hubris-like boasts to others (see above) like the British Chancellor of the Exchequer. On the other hand, we do not have an election to fight in May 2015 so perhaps we have no immediate need to do so. We also think that although the economy is certainly in better shape than it was there are several issues about the economy which may mean that its current success is only short lived. There is some way to go before we can commend the British way to other developed countries without reservation.

As Figure 1 shows, the UK economy suffered greatly after 2008 and has not yet reached the same levels seen in 2007 before the recession. Since 2012 there has been strong growth and the UK economy grew by as much as 2.6% in 2014. GDP growth of 2.6%, whilst excellent in comparison to many other countries, is only our long-term average growth rate over the last 30 years: it is commendable, but not fabulous.

Retail sales in 2014 grew by around 2.3%, the best retail sales' performance since before the recession. In 2015 we expect GDP growth of 2.4% and retail sales growth of 2.0%, but the outlook for 2016 is mixed.

UK growth in GDP

UK growth is dependent on what happens to our trading partners. We are an island but we cannot prosper unless our trading partners they also prosper: the outlook for the U.S. is favourable, but the Eurozone is stagnating or declining, and China has been slowing down in order to reduce the stresses caused by its rapid modernisation. World commodity prices and retail prices are both declining: both trends are signs of a lack of world demand.

We think 2016 will be more complex and we are expecting a slowdown in the later months of 2015 leading into 2016, and suggest a 2016 growth rate of 1.6%. Our view is that the economy, and consumers' living standards, will be under pressure by the end of the year. We would be delighted to be proved wrong.

Consumer Confidence and the Willing Consumer
Like the GDP, consumer confidence has certainly perked up since the dark days of 2011 and by July 2014, confidence was back at levels last seen in late 2004/early 2005 (Figure 1). It has fallen back a little since then.

UK consumer confidence graph

Retail spending has been patchy in 2014, excellent in the first half year and then fluctuating considerably although November and December 2014 taken together were good.

The Drivers of Consumer Spending
However wages are still not yet at the pre-recessionary level and have only started increasing by a small amount in the last two months. Figure 3 shows that GDP per head collapsed after 2008 and we are just now getting back to where we were in 2005. Total GDP is bigger in 2015 because we have a much bigger population as well as the fact that the economy is getting back to good health. It is not surprising therefore that many consumers have seen little or no improvement in their net income and they continue to be frugal in their spending.

GDP per head graph

However as Figure 1 showed, the economy is now moving quickly, but mainly as a result of increased consumer demand. There are several factors stimulating consumer spending:

  • Rising personal borrowing: unsecured borrowing (credit cards, loans and overdrafts) now stands at 168 bn. In November 2014 alone it rose by 1.25 bn, the highest growth for seven years.
  • PPI repayments: the PPI misselling scandal by which financial institutions sold customers mostly hopeless insurance policies that were claimed to cover repayments if they fell ill or became unemployed has led to massive payouts to customers by banks of more than 20 bn. This is the equivalent of Keynes' throwing money out of helicopters to stimulate demand.
  • Vigorous retail competition: consumers have been helped by vigorous competition between retailers in the UK marketplace. In grocery, the established businesses like Tesco and Sainsbury's are cutting prices and costs to deal with discounters such as Aldi; and in clothing, electricals, books, entertainment and other non-food, established retailers compete with both online retailers and discount operators. Hence consumers who are prepared to shop around have experienced a cut in prices of 2% to 3% on average, and a cut of up to 25% on major domestic items like washing machines.

Petrol and diesel prices. In late 2014, another boost to incomes occurred as a result of the fall in petrol prices (Brent crude fell from $107 a barrel in July 2014 (Reuters, 2014a) to less than $50 by January 2015 (Critchlow, 2015). These prices have not been passed on in full to the customer yet as most of the cost of fuel is tax, but nonetheless the fall since summer 2014 has cut the costs of filling up a car by say 20 each time. It will take time before it affects consumer behaviour but the fall in fuel prices should aid consumer confidence and lead to extra spending because shoppers effectively have more in their pockets. Lower fuel prices should last for at least one-to-two years and thus provide a further fillip to consumer spending for 12 to 18 months.

There are several factors therefore, both macro and micro-economic, that are improving confidence, reducing prices and producing some improvement in living standards and these should encourage customers to spend. The increase in consumer indebtedness is certainly a worry but presumably will not be allowed to continue indefinitely.

The Political Actors: does weak government harm retailing?

It is election time in May. We can expect therefore that there will no increases in taxation in the first half year or higher interest rates. Politicians' willingness to offer bribes to sections of the electorate or higher spending on worthwhile things like roads, bridges, railways, power stations and schools will be tempered in the early part of 2015 by the need to demonstrate 'realism' given that the economy is still weak and suffers from a government budget deficit and well as an adverse trade balance.

However after five years of retrenchment, there are bound to be impressive promises at election time about future tax reductions and higher government spending.

We cannot predict what will happen in the election, but it will certainly affect national economic policy. If the Conservatives win with an absolute majority, then one can expect economic policy to continue much as it is as now, but with perhaps a faster reduction in future government spending and possibly (only possibly) further cuts in benefits for the poor and cuts in local government services. We think it very unlikely that a Conservative government will take the UK out of the EU although if other EU members make few worthwhile concessions then the Conservatives will not be able to recommend continued membership in a referendum. This seems an unlikely outcome, but not impossible,

Not that it matters, but as an organisation we oppose having a referendum on membership of the EU especially as there is no evidence that any major political grouping has given much thought to running the economy outside the EU. The political choice is therefore fatuous, like a choice between jelly babies and liquorice allsorts.

If Conservatives fail to get an absolute majority they will need to govern either in coalition or with tacit agreement from the Liberal Democrats, UKIP and the Democratic Unionists (Northern Ireland). This will not be easy, although constitutionally the Cameron government can continue if it can obtain majorities in the House of Commons. Dependence on the Liberal Democrats once again may create problems if there is an EU referendum, because Liberal Democrats are fiercely pro-EU.

One can see a Labour government, even one with fewer MPs than the Conservatives, being able to form a government with support from the Liberal Democrats, the SNP, the Blaid, some Greens and left-leaning Northern Ireland MPS. They all are sympathetic towards the EU and so can unite on this issue. However they are unlikely to want to join a formal coalition and the nationalist parties are only interested in their own territories, so life would be difficult for the new government.

Economic policymaking with coalition or minority governments will not be easy. The smaller parties will extract concessions as part of the price paid for supporting the government, which may lead to higher spending and make consistent economic policy-making hard to achieve. The most likely outcome will be for two elections in 2015, the first in May and the second in September or early October. The second 'snap' election, designed to give the government a working majority, may not of course do so.

We see the political background to 2015 therefore as being messy and unpredictable. In the interregnum immediately after the 2010 General Election there was a noticeable fall in consumer spending: people seemed to be very worried about the political process. We can expect more of the same if the 2015 General Election is inconclusive - ie confidence will fall unless a government is formed that will not be temporary.

But which way will it go? In the Scottish referendum we saw, eventually, that part of the electorate could be panicked when faced with the reality that independence was not some romantic dream but one that had costs and dangers as well as opportunities. Realpolitik won. We will see whether the same is true of 2015 or whether fringe parties that have no chance of power under the UK electoral system come to dominate the centre. Whilst retailers are not necessarily the best judges of their own interests, they certainly will not want a weak government.

Food and Non-food Forecasts
For much of the recession, food and grocery spending has been quite buoyant as customers cut back on luxuries, household goods and furniture: most non-food has taken a significant hit. Figure 4 shows that although sales were flat in 2010 to 2012, the trend has been upwards since then.

Retail Sales Growth 2010-2014

In 2015, we expect food spending to rise only slightly by +0.4%, because of high competition and falling food prices. This will put further pressure on established grocery retailers to curb costs. Non-food sales we expect to grow by 3.4%, probably the highest rate since before the recession, producing overall growth in retail sales of 2.0% in 2015.

In 2016 we expect retail sales growth of 1.6%, made up of 0.7% growth in food and 2.3% growth in non-food (see Table 1).

Growth in Retail Sales 2014-2016

We see a less benign medium-term future for the British economy, caused by Eurozone problems and lack of foreign demand, political problems at home, and difficulties caused by the need to curb the trade deficit and the government budget deficit. Other things being equal, unless there are unanticipated major changes we anticipate a gradual slowdown starting later in 2015.

Clothing, sportswear, homewares, DIY, furniture and curtains and floor coverings should do well as a result of the fact that consumers have a little more to spend and the housing market should achieve moderate growth. Electronics, music, books, entertainment, and leisure should continue to achieve moderate improvements.

Our European and American Partners
Table 2 shows that the UK current account balance (balance of trade) and budget balance are both in significant deficit compared to countries like the US, Germany and France. The UK budget deficit was supposed to have been mostly eliminated by May 2015, but in practice the slow rate of recovery and the reduced tax revenues of the government since the recession have meant that the government has made the same progress as was outlined by Alistair Darling for the Labour government in 2009.

Economic Indices for Countries Surveyed (OECD estimates)

No one yet is talking about the trade deficit. A continuing consumer boom which is not associated with growth and trade in manufactured goods and service exports will be unsustainable by 2016, which is one reason why our forecast for 2016 is much lower than that of the OECD (Table 2). America at present seems to have achieved strong rates of growth and the only concerns relate to whether its progress will be limited to the widespread cooling in international trade.

GDP Growth in the Eurozone

Figure 5 shows that the Eurozone did much better than the UK, with a smaller rate of decline during the recession and emerging from it more quickly. However after 2011 the level of activity fell until 2013 and although it improved until the first half of 2014, growth there has fallen back again. It is expected to improve slightly in 2015, but even by 2016 the German growth rate is only marked as 1.8%. However the quantitate easing announced by the ECB and the fall in commodity and fuel prices might cause faster expansion than projected when the OECD forecasts were made in November 2014.

Figure 6, retail sales changes in the Eurozone, show a continual rise from late 2012, but sales have stagnated since mid-2014 and trend may even be downward.

Retail Sales 2010-2014 in the Eurozone

The Housing Market
Housing declined sharply after its 2007 peak although it has grown significantly from 2013 (figure 7). House prices rose substantially in 2014 mainly because of shortage of supply: however demand levelled off towards the end of 2014 and house prices ceased to rise. Further house building can be expected in 2015 as local authority approvals seemed to be increasing and the politicians will like a growing housing market as evidence of economic success. The increase in housing starts seem to have been prompted by the Chancellor's Help to Buy programme which provides guarantees on new mortgages. There is a case for saying that new prudential limitations on mortgages (deposit size, percentage loan, age etc) are holding the market back and we may see changes this year of banks' willingness to lend.

There are 700,000 more houses in existence now than in 2009, which is obviously a good sign, but the September quarter 2014 showed a decline in new housing starts of 10% against the previous quarter, a total of 33,000. Just to illustrate the direction we have travelled as a nation, in 1969 the main debate about housing was whether we could build more than 460,000 houses in a year not 135,000.

Construction Revenues for Public and Private Housing

A strong housing market is important for retailers because it helps non-food suppliers of DIY, housewares, curtains, floor coverings and furniture. Such businesses that have survived the long recession can expect significant increases in sales. In addition a strong housing market generates work and wages in the housebuilding sector. A balanced housing market would mean about 210,000+ units being built every year, both public and private, for at least ten years in order to bridge the gap between supply and demand for housing.

The Daily Telegraph, 8 January, p. B1.
Evans-Pritchard, A. (2015) "It's time you were competitive like Britain, Osborne tells European elite", Daily Telegraph, 24 Jan, p.39.
ONS (2013) Consumer Trends Q2 2014, London: Office for National Statistics.
ONS (2014) Retail Sales, November 2014. London: Office for National Statistics.
Reuters (2014a) 'Brent holds steady above $107; focus on Ukraine, US stockpiles', Reuters, 22 July,

Previous Reports