The cost of living crisis is not affecting all areas of the economy equally. Here we look at three key sectors and how inflation and interest rates are impacting them.
Retail
Although Christmas 2022 retail data was more upbeat that expected, it doesn’t mask the issues that the high street faces. While spending on the basics like energy and food has held up, with consumer confidence languishing near all-time low levels, the BRC (British Retail Consortium) sees discretionary spending remaining weak and consumers looking to shop for deals online. James Sproule Handelsbanken’s UK Chief Economist notes: “We have seen on-line move from 20% of sales before the pandemic to around 26% of sales today, Covid kicked off this trend, but it is being supported now by the desire to find bargains”. Bricks and mortar retailers have had to heavily discount to entice customers, but are also dealing with falling volumes and lower margins.
It’s been too much for some big names like Made.com and Sofa Workshop which went into administration. There have been some changes in shopping behaviour as consumers navigate inflationary pressures. The BRC reports that local, independent stores are enjoying more custom, as people are choosing to shop local, rather than drive. This coupled with more home working and travel disruption, has been good news for some local retailers. The BRC also reported a 15.1% increase in footfall in December 2022 which is the highest level since the pandemic began, as shoppers headed back to the shops amid postal strikes and to check out purchases in person. There are also signs that retailers want fewer but larger stores Opens in a new window and in more prestigious locations.
As far as consumers are concerned however, there has been a surge in credit card spending as people grapple with increased costs. Bank of England data showed that in November 2022 credit card spending increased at the fastest rate in nearly two decades. Even with some indication that inflation may fall in 2023 (see the article by our economics team in this edition of Viewpoint), the road ahead for retailers looks bumpy and price increases are inevitable.
Hospitality
Hospitality was already dealing with the fallout from Covid and the impact of staff shortages, now there’s inflation to contend with. Data shows a 64% year-on-year increase Opens in a new window in restaurant insolvencies, with a massive 60% of the UK’s top restaurants running at a loss. Even those with successful businesses are walking away, bruised by Covid and not prepared to wait it out while things get worse before they get better. UK hospitality sector numbers showed 500 venues closed permanently in 2022. As working practices see more people working from home, city centre venues have naturally seen a reduction in lunch time custom, with train strikes exacerbating the situation as people struggle to get to office locations.
Venues with more buying power and a more high end offering, seem to be in a better place to ride out the storm; independent, casual dining is more likely to continue to suffer. It’s a sector that remains upbeat and adaptable, shown in its versatility during the pandemic; restaurants are diversifying, reducing menu options, specialising in meat-free options and adapting opening times and happy hours to keep things ticking over. Many can make it, but will only break even.
Building, housing and construction
Rising costs and disruption to the supply chain, as a result of the conflict in Ukraine and Brexit, have all contributed to a 25% increase in building costs. In the latest Building Materials and Component Statistics Opens in a new window, released in February 2023, the average annual building materials prices for 2022 were more than 50% higher than in 2015.
Longer project timelines, lower margins and labour shortages, while trying to meet the government target of 300,000 new homes each year, means construction is having a tough time. The combination of high costs and the Ukraine conflict has created specific problems for this sector. Many raw materials like copper, aluminium and bitumen come from this region and have a knock-on effect to the production of electric cables, cladding and alloys used in window frames, which in turn is pushing up prices and pushing out timelines.
Handelsbanken’s UK Chief Economist James Sproule said: “Along with higher input costs, overall costs have been rising, triggering a predictable response from the Bank of England with the cost of finance soaring, none of this is great news for the building trade”.
The rate of housebuilding has naturally slowed too, falling by 17% Opens in a new window at the end of 2022, affected by higher mortgage rates (hitting demand – potential buyers can’t afford the higher borrowing rates so don’t buy) and the end of the Help to Buy scheme. For a sector facing these challenges it’s hard to find a positive outlook for 2023, but historically it’s a sector which can bounce back.