Despite the willingness of the global consumer base to move past the COVID-19 pandemic in 2022, the year was far from a normal one for retailers, as they were faced with a new challenge: high inflation. With rates of inflation projected to remain relatively high across Western markets in 2023, consumers are expected to continue to ration their spending over the course of this year. However, as concerns over the global financial system continue to grow, high inflation may end up being the least of retailers’ concerns.
Inflation supplants the pandemic as the most pressing threat to retail
In 2022, due to a variety of factors, the rates of inflation in many Western markets rose to the highest levels recorded in decades. Unfortunately, this was no transitory blip; inflation remained stubbornly high for the entire year. Consequently, as the year progressed, consumers in the markets most affected found the impact of inflation impossible to ignore.
Therefore, spending on big-ticket items and other discretionary goods plummeted. Due largely to these consumer cutbacks, global retail sales growth decelerated sharply in 2022. While initially, retail sales appeared to have recorded year-on-year growth, when viewed in constant prices – after stripping out the effects of inflation – global retail sales actually declined by 2% in absolute dollar terms in 2022.
Global retail sales declined by 2% in absolute dollar terms in 2022
Source: Euromonitor International
Pain felt by retail in 2022 unevenly distributed across markets
Despite the general malaise felt by global retail in 2022, some markets performed much better than others. While high inflation rocked Western countries, many markets in the Asia Pacific region faced inflation that was well within the range of recent historical trends. For example, while the rate of inflation ticked upwards in China, it remained below levels recorded in 2020, and prices generally remained stable. Yet, due to many of the same factors that helped keep inflation in check – including weakening global demand and lingering pandemic-related lockdowns over much of the year – retail in China still contracted in 2022, with sales declining by 3% in constant terms.
Retail sales growth in India accelerated in 2022, posting year-on-year growth of 7% in constant terms
Source: Euromonitor International
High inflation will continue to pose a challenge to retailers in 2023
In 2023, retailers are understandably hoping for inflation to ease. While Western markets are expected to see some relief from the relentless tide of rising prices, rates of inflation are expected to remain high by recent historical standards. As a result, even though the situation may not be quite as challenging for consumers as it was in 2022, spending on discretionary goods is expected to be muted over the course of the year. Consequently, retail sales growth across the West is likely to be subdued.
Just as in 2022, however, many countries in the Asia Pacific region are on a different trajectory. With China formally abandoning its “zero-COVID” policy, retail demand in the country is expected to ramp up again in 2023. Additionally, India and many Southeast Asian countries are projected to continue to record healthy retail sales growth.
With Asia powering the global market, retail sales are expected to record year-on-year growth of 3%, in constant terms, in 2023
Source: Euromonitor International
Nevertheless, one recent development is ringing alarm bells for retailers everywhere. On 10 March 2023, US financial institution Silicon Valley Bank collapsed, standing as the second-largest bank failure in the country’s history. Although the US government moved quickly to contain the fallout, those who remember the Great Recession of 2008-2009 cannot help but think that such a significant bank failure could be ominous for the health of the global economy – especially as some financial institutions in other countries, such as Credit Suisse, suddenly appear to be unstable. At the very least, the likelihood of a recession occurring in 2023 is much greater than it was even a few months ago. As a result, retailers now find themselves in the unenviable position of hoping that high inflation in Western markets will remain their biggest challenge in 2023.
Read the Euromonitor International article What is Driving Global Inflation? for further analysis on the drivers of global inflation.
