Retail Forecast 2025-2026

In our view, many economists approach the economy as though it were a machine: you pull a lever and then a particular thing will generally happen. Our model of the economy is akin to that of a human body, not a machine. When you pull a lever something different happens every time: fear, greed, depression, optimism, uncertainty, copying one's peers or even buying things to demonstate status. The economy is affected also by how you respond to reductions in household income or assets or the bank account. Crises caused by major events may lead to new mental frames for how you interpret influences like news of a changing world, the credibility of the powerful and the way you comprehend the economy's underlying trend by what is going on around you, in your job, in your street or on the high street. All these factors affect how households and economic actors (including businesses) respond to changes in economic policies and turns in the environment.     

The slow improvement in the UK economy during 2024 has improved volume sales in the latter part of the year. Future outcomes for retail sales in 2025 could be modelled relatively well. We delayed the preparation of our forecast of retail sales in order to take account of the October Budget of the new Government and assess its effects on consumers and retail businesses.

Every forecast must be based on three elements:

1. Where are we now? What is the current position regarding retail sales?
2. What are the existing and future expected trends for the next two years?
3. What unknowns – economic, political and military - are out there that may undermine any growth in retail sales or which may potentially produce faster growth?

Total Current Retail Sales - £427.267bn

The total volume of retail sales for the most recent complete year, 2023, was £427.267bn (ONS, 2024). It includes sales made through shops as well as online sales and mail order, but it excludes the sale of automotive fuel. By ‘sales volume’ we mean sales in real terms, eliminating as far as possible the effect of sales increases due to inflation. If the value of total retail sales grows by 5% one year, but inflation is 5%, then crudely there has been no growth at all. Hence sales volumes are used in this forecast.

The Position So Far

The last three years, 2022-24, have been problematic for the retail sector with volume sales reductions of -4.6% in 2022, further falls of -2.8% in 2023 and, although we only have data for 2024 to October and do not yet know what the busy Christmas Season has been like, we expect that overall sales in 2024 will have fallen by 0.2%.   

Although the early months of 2024 showed further falls in retail volumes, since July there has been significant growth in sales. However it is felt that the impact of the October Budget, some increase in inflation, and increased energy prices will lead to further belt-tightening by households.

 

The Forecast for 2025-6: Reduced Retail Spending, but less bad than 2022-23

The Centre for Retail Research (CRR) expect customers to be cautious about spending. Although consumer confidence has improved since the beginning of 2024, it is not yet at the levels (still negative) seen in the period 2016-2019. The increased burden of tax on the UK is likely to make shoppers wary of over-committing themselves. This explains our forecasts:

2024   - sales fall of  -0.2%

2025    - sales fall of -2.1%

2026    -sales fall of -2.5%

Labour Goverment. The 2024 July General Election produced a new Government in the UK, replacing the Conservatives. Labour has a large Parliamentary majority and was elected on a programme of economic growth. Although the scale of the Government’s majority did not reflect its share of the popular vote, the Labour Government is obviously going to be in a strong position to govern for the next four or five years before facing another election.

The year 2024 saw Britain coming out of a mild recession with consumer demand and retail sales rising. The stage was set for 2025 to be a good year for the retail industry or at least a better year.

The 2024 October Budget

The new Labour Government’s Budget involved an increase in taxation over the next year of around £40bn. This was not the largest tax increase ever, but was incongruous for a party that had won the 2024 election with a programme of stimulating growth and not increasing taxes on working people. Many businesses, normally strongly identified by the Conservatives, had become depressed by the performance of the Conservatives (three Prime Ministers since 2019, one of which only lasted a few weeks) and welcomed the change in Government. The Labour Party's first 'Steps for Change' was to "deliver economic stability", with talk about achieving the highest sustained growth in the G7 (US, Canada, France, UK, Germany, Italy, Japan). However, the recent 'Plan for Change' (Dec 2024) makes this simply 'an aim' and has been replaced by a commitment that by the next general election GDP per person will be higher than in July 2024. 

The Office for Budget Responsibility (OBR) on the October Budget. 

                  "Against a broadly unchanged economic and fiscal backdrop since March, this Budget delivers a large, sustained increase in spending, taxation, and borrowing. Budget policies increase spending by almost £70 billion (a little over 2 per cent of GDP) a year over the next five years, of which two-thirds goes on current and one-third on capital spending. As a result, the size of the state is forecast to settle at 44 per cent of GDP by the end of the decade, almost 5 percentage points higher than before the pandemic". (OBR Economic and Fiscal Outlook, Oct 2024)

Lower growth. The OBR expects the Budget will provide a small short-term impetus to economic growth, which they expect to be +1.1% in 2024, +2.0% in 2025, +1.8% in 2026, but will then then fall back to around +1.5% a year –  a similar outcome to that planned by the outgoing Conservatives. Changes to employers’ National Insurance Contributions (NIC) and above-average increases in the minimum wage will make it more expensive to employ people, particularly part-timers on lower rates of pay. The retail sector, along with hospitality, will be badly hit by these changes. The British Retail Consortium estimates that the total cost to retailers will be £7bn, while the trade body for hospitality reckons their costs will rise by around £1bn.

Consumer Spending. We are not sure that the Treasury and the OBR have correctly modelled how consumers will react. Some public sector workers have achieved higher pay and in the short term they will spend more. Pensioners and other workers whose pay has little changed since last year will probably respond by curbing spending, reducing retail sales volume yet again.

Better Consumer Confidence. The ousting of the Conservatives and the election of a Labour Government has improved sentiment in the UK. The GfK estimate of Consumer Confidence improved from -49 in September 2022 (when Liz truss was PM) to  -21 in February and March 2024. Consumer Confidence has been negative since March 2016 (it’s our culture to be pessimistic) so too much should not be made of the fact that it is mostly in negative territory.

Loss of Jobs. Deutsche Bank reckons that jobs lost because of the Budget changes will be 100,000 jobs - double the OBR estimate. Not to be outdone, Bloomberg Economics puts the potential job losses at 130,000.  

Inflation. The OBR shows that UK inflation had fallen to around 2% by mid-2024, but is expected to rise in 2025. The increase in business costs produced by the Budget means, according to the OBR, that inflation will be higher by around ½% for the next two or three years, meaning that it will take longer before average price rises return to the official target of 2% per year.

New Investment, New Infrastructure. So far, so bad. However on the more positive side, Labour plans to build 1.5 m homes by the next election. It favours heavy investment in national infrastructure, the promotion of new investment in industry with the support of new public bodies, whilst Labour hopes that its emphasis on net zero will encourage growth in net-zero projects, home insulation and the industries that will replace those based on fossil fuels. In reality, these are long-term plans (and involve a lot of hope) and are likely to have little net positive effect on growth for at least four years. The net-zero targets adopted by the new government are very ambitious, and may not be met. Compared to other countries like France and Sweden, Britain has had a bad record since the 1990s in managing large projects, speedily getting new work started, and bringing large capital projects into operation on time and on budget. Planning restrictions and appeals to courts normally cause major delays and cost increases in public works (as shown by HS2).

So whilst the CRR welcomes the new interest in increasing personal savings, building more homes, increasing investment in UK assets in meaningful ways and promoting new industries, we do not think that this alone will create economic growth till after the next general election. Indeed the scale of borrowing needed to complete these ambitious schemes may well have a deleterious effect on the UK’s standing in the bond market.

‘A Little Local Difficulty’ 

The election of a new Government meant that by August 2024 Confidence had improved from  -49 in 2022 to -13. Confidence fell again in October 2024 to -21 (probably because the Budget was predicted to be awful) but had recovered to -16 by November 2024. Labour's mishandling of major policy decisions including the Budget, plus critical reactions to news of personal gifts made by business people to prominent Labour figures may be responsible for the Prime Minister’s approval ratings falling from +11% in August 2024 to -38% in October 2024 (source: MoreinCommon, October 2024).  

A World In A Mess

When asked what were the greatest challenges a statesman might face, Harold MacMillan (Prime Minister 1957-63) replied, ‘Events, dear boy, events’.

The past four years have seen:

- a pandemic has killed millions of people, accelerated the shift towards online sales, helped undermine the stability of many large and small businesses and changed attirudes to the use of cash for payments;

- Pirates and militias operating in the Suez canal have forced many ships to take the longer and more-expensive route past the Cape of Good Hope,  increasing the prices of imports from the Far East;

- Russia's invasion of Ukraine - unforgivable in itself - has increased inflation, put up the price of energy, food and finished goods.

The unexpected event can vitiate any forecast. 

Some key events that will affect economic outcomes are briefly discussed below. 

Trumponomics. The election of President Trump has already changed both the global strategic and the economic environment. Without denying the rights of Americans to choose their own leaders, President Trump might well impose 10% or 25% tariffs to all UK exports to the U.S. or to a subset of luxury goods such as whisky, jewellery, designer goods, or goods incorporating Chinese-made components, such as electric cars. He has already said he would do this with Mexico and Canada. The long-awaited trade deal with the U.S. would certainly be helpful to the UK, but new tariffs seem more likely.

Ukraine War. A cease-fire or treaty to end this stage of the Ukrainian war would certainly be helpful to the UK economy in terms of lower energy prices and greater availability of foodstuffs. However if Ukraine – and the West – is seen to have lost this conflict, then Russia may be encouraged to mount other unprovoked actions aimed at destabilising Western nations, interrupting major IT and communications networks and disrupting energy supplies.

Agreement with EU. The Labour Government, consisting as it does mainly of Remainers hostile to Brexit, may be able to negotiate a better agreement with the EU, although we think this will be more possible in four-to-five years’ time rather than 2025-6. Any such agreement would be expected to improve UK economic prospects, although currently the rate of economic growth in the EU is even worse than ours.

 

Forecasts and Outcomes for volume sales 2018-2026 (in real terms, calculated to 2019 levels as base 100) 

-    Outcome 2018: retail sales growth                +2.2%  

-    Outcome 2019: retail sales growth                +2.8%  

-    Outcome 2020: retail sales growth                +1.0%  

-    Outcome 2021: retail sales growth                 +3.9%  

-    Outcome 2022: retail sales growth                 -4.6%  

-    Forecast  2023: retail sales growth                -2.8%    

-    Forecast 2024: retail sales growth                 -0.2%*  

-    Forecast 2025: retail sales growth                 -2.1%*  

-    Forecast 2026: retail sales growth                 -2.5%*  

      * - forecast

       The figures above are in real terms, adjusted for inflation. 

Table 1

Actual and Forecast UK Retail Sales Growth (all retail: online and physical stores) in real terms, adjusted for inflation

Period	Food Sales *	Non-food sales *	Online Sales	Online Share
2018	+1.1%	+1.7%	+10.1%	17.9%
2019	+1.2%	+1.4%	+9.6%	19.1%
2020	+4.4%	-11.8%	+45.0%	27.7%
2021	+0.3%	+9.4%	+59.4%	29.1%
2022	-6.2%	+1.0%	-11.7%	26.4%
2023	-2.9%	-2.9%	-1.9%	25.9%
2024	-1.7%	+1.0%	+8.5%	26.6%

These averages represent changes in volume sales.

*Both online and offline (physical stores)