UK August retail sales bounce back from July's poor performance

A small miss for the UK August retail sales numbers this morning, showing an increase on 0.4% on the month against an expected print of 0.5%. But comfort will be found from the fact that the reading has bounced back from July’s revised print of -1.1%, when the unseasonably cool and wet weather discouraged consumers from venturing out to shops and malls. Food and clothing sales were the big drivers behind the better number, but overall sales remain subdued, down -1.4% on the year. It is also worrying that the divergence being seen between retail sales values and volumes is continuing to widen, showing that the cost-of-living crisis is seeing consumers having to spend ever higher amounts of money on a smaller basket of goods.

Going forward the outlook for sales is looking slightly rosier, as real wages are finally growing and the pace of price rises continues to fall. In addition to this, households with savings balances are now also enjoying sharply higher interest returns. The major headwind to spending is likely to be rising mortgage repayments, which are forecast to subtract around -0.2% from quarter-on-quarter growth in household disposable incomes over Q3 and Q4. Unhelpful certainly, but probably not decisive in curtailing spending. Overall, real disposable incomes look set to end the year higher than compared to 2022, by around 2% according to estimates. Retail sales will not grow by this amount, as some of this extra income will be used to replenish savings balances that have been run-down as consumers have sought to offset the cost-of-living crisis, and as an insurance against a weakening labour market. But even if half of this money is saved and the rest spent, this still suggests a 1% rise in real household expenditure, with retail sales expected to enjoy a similar boost.

However, despite the above, and the softer CPI numbers seen this week and the relief many will feel from the BoE’s decision to keep interest rates on hold yesterday, consumers are still battling prices that are significantly higher than just a couple of years ago. And although wages are finally starting to outstrip inflation, it will be a long time before the drop in real living standards is recovered. Indeed, signs of a weakening labour market and the downwards pressure this will subsequently place on wages suggests it could take some consumers a very long time to close this gap, if at all. With UK consumption such a key driver of overall growth, whether or not the UK manages to avoid a mild recession will in large part depend upon how willing consumers are to spend any of the above extra income.