Comment: What can retailers expect this Christmas?

Retailers and speculators have high expectations for UK sales this Christmas, despite a backdrop of slow wage growth and ongoing austerity measures.

Earlier this week Deloitte predicted sales this Christmas would rise by 3.5%, bolstered by a 19% surge in e-commerce. The consultancy expects retail sales in December to top £40bn for the first time, with online sales accounting for £5bn, or 12.5%, of this spend.

Deloitte is adding to a groundswell of retail optimism. Its more recent announcement is an exact echo of Patel Miller, a retail consultancy which made the same prediction in October. Patel Miller was joined by Verdict, a retail research firm, which anticipated that the last three months of 2013 would generate sales of £88.4bn, delivering the best Christmas since before 2007.

Buoyed by such predictions retailers have been increasing staff levels and opening stores in anticipation of a pre-Christmas rush. Amazon announced in September that it would bolster UK staff numbers by 15,000 ahead of Christmas, while Game, a firm that went into administration last year, is opening 12 new stores to tap into the festive mood.

Why the optimism?

There is much to support this optimism. The last few months have brought whispers of a consumer-led recovery in the economy. House prices, especially in London, have been rising while sentiment over the summer benefitted from warm weather and feelgood factors such as the Royal birth and high profile British successes in rugby, tennis and cricket.

Resulting retail sales were relatively strong. Volumes grew in four of the five months from May to September, while consumer spending rose by 0.8% in the three months to September. Renewed positive signs in the economy have prompted the Economist Intelligence Unit to push retail volume growth expectations up to 1% for the year, compared to 0.2% a few months ago.

This has provided a context that retailers hope will only gain momentum as other factors come into play. Pay-outs over miss-sold Payment Protection Insurance (PPI) could reach £20bn, which will generate a spike in windfall spending from successful claimants.

Added to this is the recovering housing market, which has driven changes in the composition of retail sales growth over the course of the year. Sales of DIY and household related goods are undergoing a renaissance after a spell in the doldrums, prompting a much needed revival of fortunes for the retailers that stock them.

Too good to be true?

Recovering house prices, however, could also provide a reason for retailers to rein in their exuberance since new home-owners may be forced to economise in other areas.

In fact much of the focus on recovery has come from the housing market. While the summer delivered a strong uptick in sales it has been a topsy-turvy year for British retail, which struggled with sales for much of the first half of the year thanks to cold weather and ongoing consumer bearishness.

The fact remains that wage growth is still trailing inflation, and the recent energy price hikes by major suppliers may spark a reality check amongst those shoppers already feeling the effects of a free-spending summer. The Confederation of British Industry has added a sobering note to recent optimism by pointing towards flat sales growth so far in October and November.

Sales will no doubt be helped by dates such as Black Friday, Cyber Monday and Mega Monday, and UK retailers are expected to tag onto the post-Thanksgiving splurge in the USA with promotions and discounts of their own.

But even this activity, of bringing forward sales, highlights the impact of price sensitivity on purchase decisions, regardless of how overall spending performs.

With inflation running at over 2% the most remarkable thing about a 3.5% sales increase is that it is expected despite wage growth falling short of inflation for almost four years. If Christmas sales are as strong as retailers hope then a festive hangover as consumers retrench in the New Year is just as likely.

• Jon Copestake, Retail Analyst at The Economist Intelligence Unit