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Macroeconomic factors impacting retail in 2022

Full report: Outlook for the UK Retail & Consumer Industry 2022

Macroeconomic factors impacting retail in 2022

6 minute read

The impact of COVID-19 on the UK retail and consumer sector cannot be overstated. The enforcement of store closures, social distancing measures and heightened anxiety over viral transmission has hit businesses hard. Conversely, the impact has elevated ‘digital’ to new heights across the entire customer journey.

The initial stages of the pandemic saw a seismic shift towards e-commerce throughout major European retail markets as consumers explored new paths to purchase goods and services. These shifts will continue heading into 2022 as the industry undergoes further restructuring. The ongoing impact of supply chain disruption, readjustment to Brexit, rising levels of consumer inflation, and an international conflict with Ukraine, will present considerable challenges for the industry throughout 2022.

This is the first in a series of three articles derived from our “Outlook for UK Retail and Consumer 2022 report.

Retail Economics


The macroeconomic impact on retail in 2022

The UK economy achieved an impressive recovery mid-2021 as COVID-19 restrictions were lifted and consumer spending quickly gained traction.

The vaccine roll-out helped restore confidence, vital to a resilient consumer sector which represents two-thirds of the UK’s GDP. Economic growth was also aided by unprecedented fiscal stimulus as ongoing government support for businesses and households remained in place against a backdrop of loose monetary policy.

Households quickly accumulated savings as holiday plans were cancelled and less money was spent on commuting and social events. As economies reopened, demand for many goods and services bounced back strongly.

Conditions became more challenging heading into Autumn as the furlough scheme wound back, accompanied by cuts to benefits and a reduction in business support.

Simultaneously, macroeconomic headwinds gained force as tighter labour markets, supply chain disruption and a sharp rise in inflation dampened prospects for growth. Elevated levels of uncertainty caused many firms to delay investment until conditions are more favourable.

In December 2021,The Bank of England (BoE) raised interest rates for the first time in three years piling further pressure on households, together with impending tax rises and cuts to universal credit. Compounding these factors, the omicron variant hit financial markets hard serving as a stark reminder to businesses, global governments and consumers, that the effects of the pandemic are far from over.

Despite these challenges, expected growth for the UK economy is 6.9% for 2021, and 5.2% in 2022, representing a healthy rebound from the exceptional decline in 2020 and forecasted to reach pre-pandemic levels by the early part of 2022. Forecasts have been downgraded markedly in recent months, reflecting a more challenging outlook than initially anticipated, recovery is expected to be uneven across sectors and regionally. In particular, City Centre locations continue to see footfall considerably lower than other locations (e.g. town centres in the commuter belt and retail parks). Indeed, with the number of tourists remaining considerably lower than 2019 levels, city centre hotels remain under pressure, with some expecting lower occupancy rates to persist through to the latter part of 2023.


Figure 2: Top five concerns heading into 2022, by household expectations about their personal finances

Top five concerns heading into 2022, by household expectations about their personal finances - Retail Economics

Source: Retail Economics


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This work forms part of a wider piece of research and is a downloadable in pdf format


Macro summary for 2022


Macroeconomic headwinds (-)

Squeeze on spending power

  • A rise in National Insurance Contributions (NIC), a freeze on personal tax allowance and increasing inflation will see a decline in spending power for a significant proportion of households.
  • Inflation reached a 30-year high of 5.4% (Consumer Price Index) in January 2022 with forecasts suggesting an average of 5-6% in 2022.
  • The proportion of households struggling with finances has increased, particularly among those with unsecured loans. These households tend to have lower incomes and are less likely to be in employment, leaving them more vulnerable in the next phase of the crisis


Interest Rates

  • December’s interest rate rise from 0.1% to 0.25% marks the first rise in over three years (and almost 15 years since any significant and sequential increase in rates)
  • Rising rates could have a muted impact given the share of households with mortgages has fallen (30% in 2019/20 vs. 39% in 2007) and significant growth in the proportion of fixed-rates mortgages (80% in 2021 vs. 51% in 2007)
  • The psychological effect of rising interest rates could have a greater impact on spending, given the duration of time since interest rates have risen on a sustained basis. Households could interpret this as a sign of higher interest rates to come, or as a precursor to economic slowdown
  • Interest rates are expected to rise gradually to reduce any adverse impact on the economy, but could reach 1% by the end of 2022


Covid impact

  • The emergence of the Omicron variant sent shockwaves throughout financial markets, triggering a new wave of lockdown measures across the EU with border closures once again
  • Continuing uncertainty for businesses and national economies undermines confidence for investors and consumers


Supply Chains

  • On-going constraints across global supply chains are likely to persist well into 2022
  • Rising shipping and container costs are likely to be set against a backdrop of tighter labour market conditions, combining to place further pressure on margins
  • In response to patchy availability, businesses may over-order and/or build up inventory levels, shifting their reliance away from ‘just-in-time’ supply models potentially increasing pressure on warehouse storage
  • Skilled labour shortages will take longer to resolve and may be compounded by the impact of Brexit


Retail Economics inflation


Macroeconomic tailwinds (+)

Labour market

  • The labour market remains robust with low unemployment, vacancy rates high, and wages rising; these factors should support consumer spending
  • Unemployment is unlikely to rise significantly, peaking at just 4.5% according to BoE
  • A rise in the National Living Wage (+6.6%) will outpace inflation for the lowest paid



  • Many households amassed additional savings throughout the pandemic, disproportionately concentrated on middle to high income households
  • The BoE estimate an additional £250 billion of ‘excess’ savings



  • Business investment is also expected to gain traction in 2022, making the recovery more broad based than at present
  • BoE suggests business investment could rise by 17% on the previous year as sales recover and uncertainty declines
  • The Chancellor’s ‘super-deduction’ tax incentive acts as one of the policy drivers
  • Despite entering a more difficult phase of the recovery, there is now more clarity than during the past two years providing reason for optimism
  • Following a period of survival, more businesses are expected to invest so they can take advantage of opportunities within a reopened economy


Retail economics macroeconomic impact


Consumer outlook

The additional public spending announced in October 2020’s budget will reduce the tightening of fiscal policy over the next few years, but for many households, 2022 is likely to be ‘pinch point’ as a combination of tax hikes and a rise in the cost of living, erode incomes.

Inflation rose to a 30-year high as the impact of supply chain disruptions and rising energy costs pushed prices even higher.

Inflation is expected to peak at 6.5% in Spring 2022 (a 20-year high) as energy price caps are increased, and rising costs are passed through to consumers.

The prospect of a squeeze on incomes is evident from the research, showing that rising inflation is the biggest concern for consumers in 2022 – over COVID-19 and a weaker economy. Inflationary concerns were shared evenly across all age groups, but rose markedly for the least affluent households with around half suggesting it was their biggest concern heading into 2022, compared with 31% for the most affluent.

Spiralling energy costs is a key contributor with the average household footing an additional £600 per year as the cap on energy bills is raised. This will hit low-income families the hardest, the share of income spent on energy bills among the poorest households is set to rise from 8.5 to 12.0%, three times as high as the share spent by the most affluent households. The Resolution Foundation estimate that inflationary conditions and the rise in National Insurance Contributions (NIC) of 1.25 percentage points, will cost the average household £1,100 in 2022.


REtail Economics inflation impact on households


The research showed 50.4% of households expect their personal finances to weaken in 2022, and of those, 54% said that inflation was their biggest concern. This compares with just 19% who feel their personal finances are likely to strengthen.

Indeed, the proportion of households reporting financial difficulties is rising, particularly for those with unsecured loans who typically have lower incomes and are less likely to be employed. These households are particularly vulnerable to inflationary shocks and are much less likely to have accumulated savings throughout the COVID-19 crisis.

In context of rising inflation, the latest Office for Budget Responsibility (OBR) earnings forecasts suggest that real earnings will be falling in the first half the year, before returning to lacklustre levels of growth as inflation begins to soften. Overall, the average household is unlikely to see their real earnings higher at the end of 2022, compared to now.


Things to do now

Explore the second article in our three part mini-series which provides insights an anlysis for the six main retail categories and looks at actual UK retail sales in 2021, and forecasts for 2022.

You can also jump straight to the last article to learn about the '5 Key Retail Trends in 2022'.


Download the full report here

Found this short article interesting?

This article is the first in a mini-series derived from our Outlook for UK Retail and Consumer 2022 report providing in-depth analysis, forecasts and insights which focus on the key challenges for UK retail and many other consumer trends.

The insight in this report is critical for industry professionals operating in the retail and related industries for improving strategic planning, forecasts and to navigate the ongoing disruption and wider structural changes with the retail sector.

View Full Report Here

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