UK Retail Sales Boom Seen Fading with Government Financial Support

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UK retail sales rose above year-ago levels in July after unwinding the coronavirus impact in the recent quarter, although the nascent boom is yet to lift vast parts of the high street from depression and could fade alongside government financial support schemes later in the year.

Retail sales volumes were 3.6% higher in July following a third consecutive strong increase in spending that left total sales some 3% above the pre-coronavirus levels seen in February and 1.4% above July 2019 levels, with the difference explained by sales that were falling before the pneumonia-inducing disease arrived on British shores. 

The Office for National Statistics (ONS) didn't provide a summary detailing where that growth came from in July, although it did say in its own editorial that online retailers saw sales fall as the high street reopened, after months of strong growth in internet retailing.  

It did say that food store sales fell by -3.1% as online retail declined -2.1%, with clothing stores having seen spending rise by a sharp 11.9% following a late June reopening of supposedly non-essential businesses in the UK. Nonetheless, online sales were still more than 50% above pre-coronavirus levels while clothing was still down by a quarter. 

Above: Office for National Statistics graphs illustrating changes in spending across categories.

"Other parts of the economy won’t have rebounded as quickly. And with the smaller rise in public sector borrowing in July compared to June suggesting that government support is now unwinding, retail sales growth will undoubtedly slow," says Ruth Gregory at Capital Economics. 

Retail sales volumes rose by 6.1% for the three months to the end of July, when compared with the prior three months, in what was an unusually strong increase that economists see fading later in the year as government financial support for companies and households comes to an end. 

More than 9 million workers were left dependent on the government's coronavirus job retention scheme following the decision to close down the economy in March, but that comes to an end on October 31 and as far as the government has indicated to date, activity among retailers and  inother sectors might still be being suppressed by social distancing regulations at that time.

And with the economy expected to remain weak, the danger is that unemployment rises and ultimately undermines the recovery. 

"Employment, as measured by the number of employees on payrolls, was already down 2.5% since February in July and likely will fall further as the job furlough scheme is wound up. The financial pressure on households also will intensify as one-in-six mortgage borrowers who have taken advantage of payment holidays begin to make repayments in the autumn," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

Above: Economist consensus for major UK indicators. Source: HM Treasury.

Friday's retail sales data places the economy on its front foot at the start of the third quarter following a historic contraction of some -20.4% in the prior period, which was by far the worst wound sustained by a major developed world economy. Eurozone GDP fell by -12.1% in the second quarter while U.S. GDP declined just less than -10% on an annualised basis, with the UK's services heavy economy having bitten it during the coronavirus pandemic. 

"One in eight UK workers remains on furlough. Meanwhile 25% of Spanish businesses are in a ‘technical bankruptcy’, it was reported this morning. Germany wants to furlough workers for years, which would lead to a lost generation of zombie employees working at zombie companies. It needn’t be this way," says Neil Wilson, chief market analyst at Markets.com. "Just as we are at risk of sleepwalking into a lower level of existence, worse education outcomes for our children, persistently lower incomes and reduced social interactions against our will, it’s far too easy to watch the economic data and think it’s not so bad after all. The truth is it remains shocking and will get worse." 

Economists downgraded their forecasts for the full-year performance from the UK following the latest GDP data and now look for an annual contraction of exactly -10% on average for the full-year, where before the consensus favoured only a -9.2% decline back in July.

The unemployment rate is seen rising from 3.9% in June to 8.3% by year-end as the furlough scheme unwinds while public borrowing is seen coming in a £322.2 billion for 2020. Both estimates were also downgraded in the last month.