‘Why we are more downbeat on the UK retail outlook’

A key component of the British retail trade has reported on Christmas 2024 trading and, in the big scheme of things, Marks & Spencer, Next, Sainsbury and Tesco have done all right, with Next even nudging profit guidance up a tad.

However, by the end of week one of 2025, share prices were down. What do the messages from these fine companies tell us about the year ahead?

Well, it is hard to believe how the outlook of shoppers and retailers alike has changed since July 5, when Labour was celebrating its election win, telling us that after the omnishambles of the dreadful Tories – who can forget the insanity of Michael Gove and the redevelopment of M&S’ Marble Arch store – grown-ups were now in the room. Indeed, the new government went out of its way to declare its preparedness for the new Parliament.

Barely six months on, tragically for the mind space and stamina of the British, omnishambles remains an appropriate term and if grown-ups are in place they are in full camouflage. Whilst the mood music post-election was not euphoric in the main, it did not take long for the prime minister and his chancellor to seriously miscalculate messaging, tail-spinning down consumer confidence through summer and early autumn.

The Labour government had a low understanding of business and financial markets

That mood music actually turned out to be appropriate for what followed in the Budget. Whilst the immediacy of its relevance to the good households of the UK in economic terms was modest, as its impact sunk in a darker sentiment has prevailed. Prior to the Budget, Shore Capital was cautiously optimistic for the UK consumer economy in 2025, noting the end of the Tories, a rise in real living standards and the British interest rate cycle reaching its peak.

Now, however, in mid-January, we are more cautious – neutral at best. That Budget, one that will go down in British economic history, brought with it an ambition to materially raise government expenditure, including notable unconditional public sector pay awards and a substantially greater increase in labour costs than anyone sane could have imagined, most notably through the rise in business National Insurance Contributions.

Here was a big example of political ideology, naivety and stupidity coming together, showing the Labour government had a low understanding of business and financial markets.

Whilst it has taken a little time, the cumulative consequences of the Budget have been to stall what was quite sound if not stellar economic UK growth, something the Office for Budget Responsibility will confirm in March. This has lead firms to think about their labour processes, promising in time an adjustment in shedding, and to plan cost recovery, meaning price rises.

The outlook for the discretionary non-food retail segment is toughening when we thought pre-Budget, it may ease

Consequently, financial markets see scope for rising inflation, which means that the Bank of England will find it much more difficult to cut interest rates that discretionary and especially big-ticket retailers really need to boost demand.

Additionally, currency investors are looking at a slowing economy and rising government expenditure and borrowing, and thinking that they need a higher yield to buy British gilts, which fund the State beyond taxation, driving 10 and 30-year yields way beyond Trusseconomic levels.

And here is why we are more downbeat on the UK retail outlook, characterised as ever, brilliantly by Lord Wolfson; state inspired inflation, fewer base rate cuts, lower job security, low consumer confidence and the potential for tax rises and/or budgetary cuts as the cost of servicing national debt builds. With many folks prioritising consumer services over goods, plus more being expended on food, the outlook for the discretionary non-food retail segment is toughening when we thought pre-Budget, it may ease.

Rachel Reeves is learning a lot about economics fast, and elements of the British retail industry will pay for her collective incapabilities.