‘As recession looms, how will consumers behave this time around?’

Inflation at a 40-year high. Soaring food prices. Record utility bills. It has become impossible to pick up a newspaper, switch on the TV or visit a news site without seeing wall-to-wall coverage of the cost-of-living crisis. 

You may have even seen recently that in Blackpool the price of fish and chips has increased by a whopping amount and is now over a tenner on average. Hardly ‘cheap as chips’. I am sure it is the same in many other seaside and coastal towns.

Our latest consumer sentiment survey shows confidence has declined across all demographics and socioeconomic groups, with 76% of consumers already worried about the rising cost of living.

Sentiment has only been lower on two occasions: immediately following Lehman Brothers’ collapse in 2008 and during the post-recession austerity period in 2012.

“The desire to spend has dropped across nearly every age group, demographic and shopping or leisure category”

Worryingly, inflation is expected to get even worse before it gets better, particularly with the energy price cap set to rise again in the autumn. PwC’s economics team forecasts inflation to peak at just under 12% by the end of this year and the Bank of England has predicted a drawn-out return to normality, suggesting inflation may not return to 2% until the second half of 2024.

Young and old, rich and poor – the cost of living is on everyone’s minds. 

It is certainly tough for most people right now. Our survey shows more than three-quarters of people have had to cut spending over the past three months by buying less or trading down in an attempt to ease financial pressures.

The desire to spend has dropped across nearly every age group, demographic and shopping or leisure category, even those that usually hold up well. 

Inflation has increased so rapidly in the past few months that more of people’s money has had to be diverted to food, utilities, petrol and other essentials, leaving less spare cash available for discretionary spending. 

Rapid recovery?

As people start to show recessionary-type behaviours, the pressing question for retailers is: how will consumers behave this time? How can they best prepare? 

To predict that, it is worth looking back at how retail fared in 2008, the time of the last prolonged recession in the UK. The home and clothing categories are good examples of why things might be different this time. 

In 2008, we saw real consumer spending on furniture and home furnishings drop by 27%. With a housing market decimated by the recession, the home category took years to recover.

Despite interest rate rises, there is little evidence to suggest we will see anything like the previous slowdown in the housing market. As long as the market remains strong, we expect a deep initial hit to the category but one that will bounce back quickly. 

It will also be interesting to see how fashion retail performs. With an almost 25% decline in clothing retail sales in 2020 and many big high street names leaving the market over the last two years, it was the last sector to recover from Covid-19.

It will be supported by a natural bounceback, coupled with people taking long-delayed holidays and attending postponed weddings and other special events, as well as investing in new workwear.

“Circumstances suggest that if we do see a recession, it will be less prolonged this time around, with a more rapid rebound”

As long as demand for those events remains strong this year, people will want new outfits. That means even with a delayed drop in spending, clothing is likely to see a shallow decline and quick recovery.

Interestingly, clothing was one of the most resilient categories during the last recession, with a smaller decline and quicker recovery than almost all other retail categories.

This time, fashion will be more protected because capacity was taken out of the market during the pandemic, albeit new competition such as online marketplaces for pre-loved fashion – growing in popularity, particularly among younger shoppers – could present a challenge in future years.

Elsewhere, other circumstances suggest that if we do see a recession, it will be less prolonged this time around, with a more rapid rebound. 

Positive factors, such as high employment, Covid-19 savings not yet spent and government help to businesses over the last couple of years, suggest – unexpected global shocks aside – we could see a stronger and quicker bounceback. 

While retailers should be braced for a potentially deep initial hit – particularly over the coming six to 12 months as the cost-of-living crisis peaks – those that can best weather the storm will be well placed for a quicker post-recession recovery.