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Outlook for the UK retail sector in 2016

Retail is an inherently dynamic sector. The last 12 months have seen the UK retail landscape in continuous flux with digital and online technologies forging an inevitable shift in retail business models adapting to today’s consumers. Underlying these sectoral challenges lie a complex macroeconomic environment which underpins consumer sentiment and spending power.

UK households haven’t had it better in over a decade. The perfect storm of record low interest rates, deflation across non-discretionary items, rising real wages, all-time highs in employment and robust consumer confidence saw a sharp recovery in households’ spending power. It resulted in the strongest growth in consumer spending since 2007, during the credit-fuelled boom.

So after a landmark year in the consumer recovery, what does 2016 hold for the UK retail industry?

While we expect strong underlying momentum to continue into 2016, the consumer recovery is likely to lose some steam. As we near the anniversary of sharp falls in the price of oil and other commodities, this “base effect” will mean inflation will begin to creep back up in the first quarter of 2016. In addition, renewed austerity measures, a potential rise in interest rates and a slowdown in the labour market recovery will all dampen spirits.

Nevertheless, we remain optimistic that consumer confidence will remain strong and so spending robust. We forecast consumer spending to rise c.2% in 2016, softer than our expected 3% in 2015.

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