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Retail performance expected to dip in Q3

Retail performance is expected to dip in Q3 by -1 index point, according to the latest Retail Health Index from the KPMG/RetailNext Retail Think Tank (RTT), an independent board of retail experts.

While retail health in Q2 remained resilient according to the RTT Retail Health Index, the industry’s only comprehensive, sector-level quarterly benchmark of retail performance, with the index score of 70 propped up by stronger than expected consumer demand, it is predicted that this will dip -1 index point to a score of 69 by the end of September.

Data from RetailNext’s footfall index, which captures billions of store visits globally each year, showed that Q2 shopper traffic – a key indicator of High Street health – dipped by -5.2 percentage points quarter-on-quarter.  ONS’ data released last week showed the UK economy as a whole managed to shrug off a recession, posting a 0.2% increase in GDP growth in Q2 to avoid stagnation.  Yet while the small increase in GDP in Q2 means the UK avoided officially sinking into a recession, it leaves the UK stuck in a ‘low growth trap’, prompting Capital Economics to predict GDP will fall in Q3, prompting a mild recession.

The RTT Retail Health Index also predicts a similar Q3 slowdown in retail performance , predicting that retail health will dip -1 index point in Q3 to 69 points.  This represents the lowest point since Q3 2020 when the UK was in the midst of tiered lockdown restrictions and about to enter Lockdown 2, and -23 points lower than Q3 2008, at the start of the Financial Crisis and the beginning of the Credit Crunch.

This is expected to mark a tipping point, with consumer confidence and the resilience seen in Q2, starting to crumble, as retailers and consumers face a ‘third wave’ of disruption as a result of higher interest rates, spiralling mortgage costs and their impact on customers’ spending power.  In its report, the RTT predicts that the disruption caused by an inflationary-driven downturn could take the industry up to three years to recover based on historical parallels.  And it suggests this interest rate-driven ‘third wave’ of disruption will have an arguably more significant, deeper felt and longer-tail impact on customer spending than covid and the cost-of-living crisis combined.

UK Head of Retail at KPMG and co-chair of the RTT, Paul Martin, commented: “Looking ahead to the next 12 months we expect trading conditions for the retail sector to remain challenging. Inflationary driven downturns are usually much lengthier than other financial shocks to unwind, normally three to five years.  Inflation and its impact on our economy isn’t going to be a short blip, it is going to be a lot more long-winded.”

Gary Whittemore, co-chair of the RTT and Head of Sales EMEA & APAC at RetailNext, added: “This isn’t the first storm retailers have had to weather, but the long-term nature of this economic shock means the response needs to be both fast and radical.  Retailers need to be sharp in focus, understand their customers better, and get cost and business models right, otherwise failure beckons.  To manage these disruptions, retailers will need to know their customers, differentiate themselves from rivals, communicate a strong and meaningful purpose, and execute very well, notably with greater assistance from technology.”