Despite improving economic conditions and better customer sentiment, storm clouds may be gathering on the retail horizon.

Since 2009, the effect of weak consumer demand and a shift to online sales has meant that same-store sales growth has been virtually zero across the sector. 

In 2015, uniquely favourable factors lead us to expect positive growth in non-food. The exception is grocery retail, which will continue to suffer from intensifying competition.

The principal reason for a return to positive trading is ‘good’ deflation.

The cost of a grocery basket is down by 2.5% annually, thanks to bumper harvests in 2014 as well as retail competition. Filling the tank has fallen by 16% and household energy by 2%, both a consequence of the halving of the sterling price of oil. Added to these is the wider cost drag of the appreciation in sterling since 2013.

And mortgage costs have stayed at all-time lows. Overall, essential item inflation is now negative, boosting annual growth in discretionary income by about £10 per week. 

In addition, an end to wage stagnation and continued strong employment have lifted growth in household income by £5 per week. So in total, net income is accelerating by 9%, versus only 2% a year ago. 

That is feeding through into strong growth in actual spending as the savings ratio continues to fall.

Households are feeling confident about future income growth and employment prospects.

These tailwinds seem set fair for 2015, but derive from one-off effects.

By the end of the year imported deflation will begin to annualise out.  And although wages will grow as labour market slack narrows, that will feed into domestic inflation, so neutralising the benefit for spending power. Consumer Price Index might well return to its target of 2% next year, causing household spending to flatten.

Another source of demand is waning. Redress for missold PPI has so far pumped around £20bn into consumers’ pockets, equating to an average 2% increase in household net income over each of the past five years. 

Only 12% of households saved any portion of this windfall. However we are almost reaching the dregs of this particular punch bowl.

From next month savers reaching the age of 55 will be able to draw out of their pension pot as and when they like. It is probable that this will lead to a short-term uplift in spending, nicely timed to replace PPI. Big-ticket retailers (such as sofas, appliances and kitchens) may see a benefit.

The one big uncertainty in the short term is the election. A prolonged period with no result will risk weakening confidence or even a sterling crisis.

Longer-term, we do not expect favourable trends to continue at the same rate and there are some clouds on the horizon. Private and public investment have both been weak, and productivity has slumped.

Output per hour is 15% below its pre-crisis trend rate, explaining why job creation has thrived. But now that unemployment is reaching its lower limit, rekindling productivity is essential to sustained growth in income and as the largest private sector employer, retail must play its part.

  • Michael Jary, partner, OC&C Strategy Consultants