UK retail sales disappoint once again

Another disappointing set of retail sales figures from the UK this morning, with the latest report for June showing headline sales falling -1.2% on the month and in the process taking back a large chunk of the +2.9% growth seen in May. On a monthly basis, headline sales fell by -0.2%.

Much of the blame for today’s weak numbers will again be laid at the door of the weather. In what would ordinarily be a boost to sales, rainfall was 24% below average for the month. But it was the cooler weather that appears to have kept shoppers at home, with temperatures in June noticeably lower than those experienced in May, which was the warmest May since at least 1884. It appears shoppers expressed their disappointment with June’s lower temperatures by abandoning high streets and shopping centres.

Today’s numbers have very much repeated the volatile nature that has been seen in the numbers so far this year, with the weather appearing to be playing an increasingly disruptive role in influencing consumer behaviour. And this enhanced volatility makes it that much harder to determine what the true underlying picture is. But despite the monthly swings being seen, on an annual basis sales are showing steady, if unspectacular, growth, benefitting from rising real incomes and slowing goods inflation, something that stands out particularly strongly when compared to the much faster pace of price increases being seen in the services sector. And with an increasing number of households now saying that savings balances have been restored, as disposable incomes rise further so much of this additional spending power should find its way onto the high street.

On a quarterly basis, retail sales fell by -0.1% in Q2, meaning they contributed nothing to overall GDP; any boost to growth from spending will be delivered from spending on services and from business-to-business spending. Within the figures, all the major categories showed declines, and volumes were much lower than had been suggested by the various forward-looking surveys. This suggests there remains the potential for today’s number to be revised upwards and for the July figures to show a rebound. Indeed, some of today’s fall was offset by a smaller 0.4% upwards revision made to the May figures. So at this stage there is some reason to suggest the numbers may yet turn out to be better than reported today.

Going forward, it is clearly becoming more difficult to forecast the retail sales numbers with any degree of confidence. But what we do know is that, aside from the above, spending is likely to face a significant headwind in the near-future from the rise in the level of general taxation that will be hitting the UK, as the new Labour government is forced to increase taxes to both avoid a real cut in the provision of public services as well as for funding its own pet political projects. Given the importance of domestic demand to total UK output (around 60%), the implication of weaker consumption will be a slower rate of growth going forward; and this will potentially slow the pace of monetary easing the Bank of England will be comfortable delivering.