Scott Wright: Will consumers pay price for Christmas sales bonanza?

Underlining the sudden change in mood, the Scottish Retail Consortium declared yesterday that the industry had ended 2022 with a “flourish” following “two miserable years”, as it reported total sales in Scotland had increased by 11.3 per cent in December compared with the same month the year before.

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“December’s retail sales shone compared to recent months and the comparable month the year before as shoppers returned to spending and took advantage of the first Christmas in three years without pandemic-era curbs or instructions to shun socialising,” said David Lonsdale, director of the SRC.

“In gross terms, taking into account inflation and excluding Covid-era distortions, this was the best monthly performance in 20 years.”

Given how concerned people have rightly been about the rising cost of living in recent months, which was initially sparked by the surge in energy prices after Russia’s assault on Ukraine and has been followed by steep increases in interest rates, it could on the one hand be welcome that these businesses have performed so well.

Retailers such as Tesco, Marks & Spencer, and Next are major employers in Scotland, therefore the country has a significant stake in their continued prosperity. And it is certainly fair to say that many retail businesses have been under considerable strain over the past three years, with the challenges of Covid restrictions followed quickly by the current cost crisis (though it should be noted that, broadly speaking, grocery retailers did well in the depths of the pandemic as people were unable to visit bars, restaurants or get away on holiday).

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Moreover, it is understandable that many consumers may have felt compelled to splash the cash a little at Christmas, with many of us having been denied the opportunity to celebrate the event with family and friends in the two previous years because of Covid. Some households may also have tapped into the last of savings they were able to make during lockdowns, when there were fewer opportunities in which to spend disposable income.

However, given the ferocity with which inflation has surged in recent months (official figures published on Wednesday showed annual UK consumer prices index inflation was 10.5 per cent in December, compared with 10.7% in November) and interest rates now standing at 3.5% and forecast to edge up further still, there is justifiable concern that people will have slipped further into debt to pay for Christmas.

That concern has been underlined in recent days by StepChange, the consumer debt charity.

Highlighting the continuing impact of the cost-of-living crisis, it pointed to the Bank of England’s latest money and credit statistics, published on January 4, which showed that consumers borrowed an additional £1.5 billion on consumer debt in November, on a net basis, above the £0.7bn borrowed in October. This increase, higher than the six-month average of £1.1bn, was driven by an additional £1.2bn of credit card borrowing, the statistics showed.

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Worryingly, the figures related to the month of November: while many people do begin preparing for Christmas in November, the peak period for festive shopping and parties is December.

“The impact of the cost-of-living crisis on people’s finances shows little signs of abating,” said Richard Lane, director of external affairs at StepChange. “Although government support is continuing to have a positive effect on the proportion of new StepChange clients with energy arrears, energy debt remains high and cost pressures from elsewhere are still driving people into problem debt.

“Today’s (January 4) Bank of England figures showing increased borrowing even before the traditional festive period is also worrying, particularly in light of our pre-Christmas research which found that one in 12 UK adults (8%) would be using credit to pay for Christmas.

“With financial pressures across the board creating problems for an increasing number of households, there is a real danger that people will increasingly be turning to credit to meet essential spending into the new year and beyond.”

In such challenging circumstances, it is essential that falling wholesale gas prices are passed on by energy companies to consumers (and businesses). The rate of inflation remains very high, and, further, an increasing number of homeowners will soon be spending a lot more every month on their mortgages.

In an interview with The Herald this week, Paul Denton, chief executive of the Scottish Building Society, set out in stark terms the difference that interest rates at the current level will make to households, warning that there will be no return to the near-rock bottom rates that pervaded for more than a decade after the financial crisis of 2008 and 2009.

Mr Denton did observe that the higher interest rates would benefit those who are able to save, but said that people with average mortgages will have to pay between £250 and £300 per month more in the years to come after current fixed-term deals come to an end.

“This is not a blip that will go in six months,” he said. “This is us returning to a normal level of interest rates and consumer behaviour needs to adjust to a new normal.”

Mr Denton added: “It is like a storm gathering on the horizon. It has not hit land yet. We have not seen a significant uplift by any means with regard to customers calling in experiencing financial difficulty around their mortgage payment. But we do know it will become more difficult over the course of the next few years.”

And that is a very worrying prospect indeed.