SK: Retail Sales Weakened Amid Household Concerns and Fiscal Consolidation

Retail sales declined by 2.6% year-on-year in February. On a month-on-month basis, they dropped by 0.8% after seasonal adjustment. This is the first year-on-year decline after thirteen consecutive months of growth, a downturn that had already been hinted at by data from the state monitoring system. The negative development affected as many as 8 out of 9 retail components. Only specialized stores, such as those selling textiles, footwear, drugstore goods, and pharmaceuticals, remained in positive territory. Overall, retail turnover dropped by 0.9% in the first two months of 2025.

We attribute the decline primarily to worsening consumer sentiment and potentially the impact of early purchases made in December, when households stocked up in anticipation of price increases mainly driven by higher VAT. This effect may have already influenced Januarys retail performance, which saw year-on-year growth of less than one percent, following a strong increase of 10% in December.

The household savings rate, as a share of disposable income, came under pressure in the second half of 2024, falling to 3% in the fourth quarter (seasonally adjusted, excluding pension). This shrinking "comfort zone" for households has ultimately been reflected in deteriorating sentiment.

In 2025, we expect household consumption to continue growing, albeit at a slower pace. Households will face pressure from fiscal consolidation measures and higher inflation, although real wages are still expected to rise. Retail sales may fluctuate throughout the year, with trends strongly influenced by consumer confidence. In recent months, confidence has fallen below its long-term average, mainly due to negative expectations related to fiscal tightening, rising prices, and broader concerns about the economic outlook and the ability to save.

Households are facing multiple concerns stemming both from domestic and global environments. In addition to slower growth in average nominal wages, disposable incomes will also be affected by a reduction in the child tax bonus, whitch will naturally weigh on consumption and shopping appetite. On the positive side, a still-resilient labor market should continue to provide a solid foundation for gradually increasing in overall household consumption.