Retail Sales Flop Another Deterrent to 2022 Bank Hike says Economist

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UK retail sales fell 0.9% in August on a month-to-month basis, which is a slight improvement on July's figure of -2.8% but confounds analyst expectations for growth of 0.5% to be reported.

This means sales were flat in the year to August, down on the 1.9% growth reported in July and below the consensus expectation for 2.7% growth.

The Pound was seen trading softer in the wake of the release.

These retail sales figures are the latest to provide confirmation that the UK economic rebound slowed sharply in the summer months,

"August’s retail sales data bring more evidence that the recovery in consumers’ spending has lost considerable momentum," says Samuel Tombs, Chief U.K. Economist, Pantheon Macroeconomics.

Image source: Office for National Statistics – Monthly Business Survey – Retail Sales Inquiry

"A poor UK August retail sales report may take some of the momentum out of the rise in UK money market rates and also GBP," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING.

Data shows that a significant downward drag came from food store sales volumes which fell by 1.2% in August.

The ONS says there is evidence to suggest that the further easing of hospitality restrictions had an impact on sales as people increased their social spending, such as eating and drinking at restaurants and bars.

This is supported by data from Open Table, which showed a pickup in online restaurant reservations in August.

Image source: Office for National Statistics – Monthly Business Survey – Retail Sales Inquiry

This switch is not necessarily a drag on broader economic growth given the loss to food retailers benefits other businesses.

"This probably isn’t as gloomy a sign for the overall economic recovery as it may seem as at least some of it reflects households shifting their spending to elsewhere after the lockdowns," says Dales.

However, ongoing supply-side pressures could also be behind the data as global and domestic supply chains remain constrained by a plethora of post-pandemic issues.

The ONS reports in the last two weeks 6.5% of businesses in the retail industry were unable to get the materials, goods or services they needed.

"Pent up demand and lockdown savings may have sustained growth this summer, but this latest set of figures indicates that supply chain issues and weakening consumer demand are beginning to bite," says Aled Patchett, head of retail and consumer goods at Lloyds Bank.

Patchett says those trade headwinds are only likely to intensify as we head into autumn, with product limitations potentially restricting sales volumes during the critical golden quarter.

"Many big retailers have already issued warnings in relation to their ability to get the right products on shelves, while the UK’s Covid-fuelled appetite for online fulfilment will be tested in the run up to Christmas if current driver recruitment issues aren’t addressed," says Patchett.

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Furthermore, the data shows the high-street has been unable to retrieve lost volumes caused by the pandemic as the proportion of retail sales online rose to 27.7% in August 2021.

This is up from 27.1% in July and is substantially higher than the 19.7% in February 2020 before the pandemic.

Concerning the outlook, Pantheon's Samuel Tombs says the retail sales contribute to his view the Bank of England won't raise interest rates in the first half of 2022, which is currently the market's consensus expectation.

"The near-term outlook for households’ spending is overcast," says Tombs who was ranked the most accurate forecaster of the UK economy in 2020 by Refinitiv.

The drop "should fuel doubts about how soon the MPC will hike interest rates," he adds.

Tombs says households’ real disposable incomes will decline in the fourth quarter as CPI inflation soars to about 4.0%, labour income drops in the wake of the closure of the furlough scheme and the £20 per week uplift to Universal Credit is withdrawn.

The government's recently announced National Insurance Contribution tax hikes is also expected to weigh on disposable income while the prevalence of Covid-19 is expected to ensure households stay cautious.

Pantheon Macroeconomics expect households’ spending will take until the third quarter of 2022 to return to its pre-Covid peak.

Foreign exchange markets have bid the Pound to its current levels on the basis that a 2022 interest rate rise is likely in the first half of 2022, therefore any pushback to this date would likely pressure the UK curency.