Retailers are facing a tough new year as weak consumer demand is expected to combine with a barrage of increased costs, including the higher minimum wage. Shoppers are likely to keep their spending on pause during the first months of 2024, according to forecasts published today by the Retail Think Tank, a group of industry experts who analyse the health of the sector, as mounting mortgage and rental costs weigh on consumer confidence. “It is going to get worse,” said Paul Martin, the UK head of retail at advisory firm KPMG. While demand could pick up in the spring, when retailers are expected to face a financial squeeze – particularly those trading solely online in the hard-hit fashion sector or without strong financial backing – as the April rise in the minimum wage and a 6.7% business rate increase for most retailers kick in. “There will be pressure on consolidation,” the thinktank concluded – suggesting that buyout deals and mergers would be on the cards. The run-up to Christmas has been “pretty subdued”, Martin said, with shoppers buying fewer items as they battled higher household bills. Clothing sales have been particularly hard hit amid relatively warm weather, and shoppers have held back from making expensive purchases such as furniture or big electrical goods. In October, retail sales fell 2.7% year on year, according to the Office for National Statistics with even supermarket sales barely registering growth. There could be a very strong end to the season, as we saw in 2022, as many families take advantage of the full week of trading, including a whole weekend, ahead of Christmas Day on Monday. The relatively late end of term for many schools will also fuel a last-minute rush. However, most decisions on the biggest part of the non-food shop – clothing – will have already been made ahead of Christmas parties, so Martin concluded that “at best there is going to be stagnation”. Nick Bubb, the independent retail analyst who also sits on the panel, said: “The final quarter of 2023 saw a lacklustre performance with volume pressure in non-food categories and the real sense that consumers are tightening their belts. Whilst a lot depends on what we see happen over the next few weeks, there has already been a lot of discounting and this is likely to continue after Christmas as well.” Some consumers should have more cash in their pockets post-Christmas, as wage growth is finally outstripping inflation and cuts in national insurance contributions and fuel bills. However, the thinktank believes that concerns about the wider economy and high borrowing costs will mean consumers will keep their finger on the spending pause button in the opening months of 2024. The Bank of England’s announcement that interest rates will remain at an elevated level will not bring comfort for those coming to the end of mortgage deals, car finance agreements or needing a loan, while gloom around the ailing economy could undermine employment confidence and opportunities. “Despite further falls in inflation and, from the middle of the year, the Bank of England potentially starting to reduce interest rates, we expect the UK economy will struggle to gain momentum in 2024. Household spending generally will only grow slowly, and likewise retail sales,” said Charles Burton at the analysis firm Oxford Economics, another member of the panel. Health and beauty is expected to be one of the few sectors to enjoy continued growth in the new year – building on the run up to Christmas – as small treats, often called the lipstick effect, continue to win over shoppers. However, luxury retail and big-ticket categories, such as furniture and home appliances, are expected to experience a continued downturn. The Midlands, Scotland and northeast of England are expected to be particularly hard hit as job losses in the industrial sector affect regional spending power, according to Burton.