Better Days Ahead for UK Retail Sales, May's Data Could Represent the Low
"As the effect of the fall in the Pound on inflation starts to fade, there should be scope for spending volumes growth to accelerate." - Capital Economics
Latest data shows UK retail sales for the month of May came in well below expectation, leading to a fall in Pound Sterling.
Month-on-month retail sales fell 1.6% according to the ONS, double the 0.8% decline that analysts had been forecasting.
Annualised sales are now at 0.9% where economists had forecast them to be at 1.7%.
This will deal a significant blow to UK economic growth which is centred on the ability of the consumer to spend.
Foreign exchange traders know this and have sold the British Pound as a result. The Pound to Euro exchange rate is quoted at 1.1360 having been as high as 1.1389 earlier, the Pound to Dollar exchange rate is at 1.2710 having been as high as 1.2762 earlier.
The retail sales data are a natural response to the rise in inflation the UK has witnessed through the course of 2017.
It was reported this week that inflation is now outstripping rises in pay leading to a fall in real incomes.
“The year-on-year growth in the quantity bought for retail sales in May 2017 was at 0.9%. We have not seen lower growth on the year since April 2013. Increased retail prices across all sectors seem to be a significant factor in slowing growth,” says Ole Black, ONS Senior Statistician.
The 1.2% monthly fall in retail sales in May only reversed part of the 2.3% rise in April. Accordingly, even if sales fell by a further 1.0% in June, they would rise by 0.9% in Q2 as a whole – compared to a 1.6% fall in Q1.
The ongoing consumer slowdown comes in an environment of a very low household savings "ratio which skews the bias of risks to the downside," says Sam Hill at RBC Capital Markets.
The household savings ratio has fallen to 3.3% (end-2016) from over 6% a year ago and 11% in 2010.
"Aside from contributions to occupational pensions, discretionary saving has been very thin indeed. The consumer could find it difficult to smooth its spending profile in the face of income or confidence shocks at this stage," says Hill.
The impact of the fall in the Pound on prices appears to be weighing heavily on spending volumes growth.
Recall the slump in the value of the Pound since the EU referendum has raised the cost of imports, and for an importing nation such as the UK this has inevitably been felt on the shop floor.
However, analyst Scott Bowman at Capital Economics is optimistic on the future saying inflation should now start retreating which would allow sales to increase:
"The fact that growth in sales values has held up well in recent months suggests that uncertainty isn’t holding back spending. Accordingly, as the effect of the fall in the Pound on inflation starts to fade, there should be scope for spending volumes growth to accelerate."
Note that despite the cash squeeze underway and the impact this is seemingly having on spending behaviour, so far consumer confidence has looked surprisingly resilient.
The GfK consumer confidence index has held between -5 and -7 over the past 6 months.
So the May reading could well represent the low.
But others are not so optimistic and are looking for this trend to continue.
"One question is therefore whether a further bite to spending behaviour lies ahead when the penny drops over the extent of the squeeze in living standards and as households act to rein in overall spending," says Philip Shaw, an economist at Investec in London.
