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British retail sales rose unexpectedly in September, defying analyst forecasts of a contraction, as consumers increased their spending on technology despite looming tax rises and economic uncertainties.
According to the Office for National Statistics (ONS), retail transactions grew by 0.3% in September, building on a strong 1% increase in August. Analysts had forecast a decline of 0.4% for this month.
While technology equipment saw strong sales, supermarket spending faltered, with consumers cutting back on luxury food items amid concerns about rising costs. Retail sales are still 0.2% lower than before the pandemic, underscoring the ongoing challenges facing the sector.
For the three months to September, sales rose 1.9%, the biggest quarterly increase since July 2021. Hannah Finselbach, senior statistician at the ONS, commented: “Tech stores reported a notable increase in sales, offsetting weaker performance in supermarkets. due to bad weather and cautious consumer spending on luxury items.”
Consumer confidence and spending patterns
Erin Brookes, European retail and consumer leader at Alvarez & Marsal, attributed the growth to factors such as record rainfall and early winter chills, which boosted demand for warm clothing. “While consumers remain price-conscious, budgets are slightly less pressure than a year ago,” Brookes noted, although she warned that uncertainty ahead of the autumn budget could hit consumer confidence.
Oliver Vernon-Harcourt, head of retail at Deloitte, pointed to a “back-to-school boost” in September, with strong sales of computers, clothing and shoes. However, he warned that consumers are still reluctant to make big-ticket purchases, while sales of smaller, non-essential items helped boost sales values.
Preview of the autumn budget
The rise in retail spending comes ahead of Chancellor Rachel Reeves’ first budget on October 30, where tax rises and spending cuts of £40 billion are expected. Reeves and Labor leader Sir Keir Starmer have defended the need for “tough decisions” to counter higher-than-expected spending this year inherited from the previous Conservative government. Their comments have raised concerns among consumers and businesses about the potential economic impact.
Consumer confidence is already showing signs of fragility. The GfK consumer confidence index fell to minus 20 in September, compared to minus 13 the month before, due to growing concerns about the cost of living and expected measures in the upcoming budget.
Potential for future growth
Despite current concerns, the economic outlook could improve further in the coming months, which could support retail growth. The Bank of England is expected to cut rates by 25 basis points in both November and December, bringing the base rate down to 4.5%. This follows a fall in inflation to a three-year low of 1.7% in September, which helped ease pressure on household budgets.
With wage growth remaining robust at over 4% and exceeding inflation, household living standards are gradually improving. However, many consumers have increased their savings in the post-pandemic period, potentially limiting demand for discretionary spending. How this balance between prudent saving and improving wages will play out for retailers remains to be seen as the year draws to a close.