Retailer morale on the decline due to financial repercussions following Rachel Reeves' Budget adjustments on the high street
UK Retail Sector Bears Brunt of Budget Policies
The retail sector in the UK has experienced a marked decline in optimism this month, with the sharpest drop since the pandemic, according to a survey by the Confederation of British Industry (CBI). The decline can be attributed to the measures introduced by Chancellor Rachel Reeves in her Budget, specifically the increase in National Insurance and the inflation-busting rise in the National Minimum Wage.
Retailers have experienced pressure to reduce hiring due to these fiscal changes, with job vacancies seeing a significant drop. Advertised retail positions have fallen by over 39% compared to the previous year, indicating a slowdown in retail employment growth. Employment confidence is also on a downward trend, with consumer services expecting to further cut their workforce in the near future.
The combined effect of increased National Insurance Contributions (NICs) for businesses and the 6.7% hike in the National Living Wage to £12.21 per hour has led to a substantial increase in employment costs. As a result, retailers face an additional £5 billion in costs, leading them to raise prices to offset these expenses.
Food inflation is proving to be another challenge, with prices climbing 2.8% in May, up from 2.6% in April. Rising costs have particularly affected fresh food prices, with inflation rates for these items rising from 1.8% to 2.4%. Prices for perishable items such as steaks and burgers have increased due to escalating wholesale beef costs.
The policies have also impacted overall business confidence in the retail sector, with selling prices now above average for eight consecutive months. Profitability expectations among businesses are also on a decline, with expected further deterioration in the coming months, reflecting both escalating costs and reduced consumer demand.
In addition to these impacts, the retail sector is grappling with other pressures such as reduced competitiveness due to the removal of VAT-free shopping for international tourists and ongoing global trade tensions. Although these challenges are not directly linked to Reeves’s National Insurance and wage policies, they further compound the pressure on the struggling retail sector.
In an attempt to manage escalating costs, some retailers might consider diversifying their investments, such as investing in stocks or financial instruments, to supplement their income and maintain profitability.
However, despite the challenges faced, insurance companies might find the current market conditions beneficial, as businesses inclined to invest less in retail expansion may seek more insurance coverage to hedge against potential risks.
