Increase in July UK retail sales surprises economists, though uncertainty remains over long-term economic outlook
Retail sales in Britain rose 0.3% last month despite poor weather, as petrol price cuts by supermarkets and bargain offers in the high street spurred spending. Here is what economists made of the numbers:
Vicky Redwood, chief UK economist at Capital Economics
Not only did retail sales post a reasonable rise in July, but an upward revision to June’s figures added to other evidence suggesting that the preliminary estimate of GDP will be revised up next week.
Sales should maintain this positive momentum in the near-term as the boost from the Olympics comes through. Admittedly, the Games had already begun by the end of July and the ONS said feedback from retailers suggested that there had been “no impact on sales from the Games in this trading period”.
But anecdotal evidence suggests that consumers initially steered clear of the high street when the Games began, and then returned to the shops as Team GB’s medal count increased.
That said, the boost from the Olympics will be short-lived and may be “paid for” by lower spending later in the year. Indeed, although some of the more fundamental constraints on consumer spending are now lifting – most obviously the squeeze on real pay from high inflation – consumer confidence is still low, debt is still high and the economy is in recession. Accordingly, a sustained, strong pick-up in spending still looks unlikely.
Alan Clarke, director of fixed income strategy, global banking and markets at Scotia Bank
UK retail sales for July were on the firmer side of expectations. But it was the massive upward revisions to the previous month that was the biggest surprise. The net result is that percentage year-on-year retail sales growth is over a percentage point higher than previously thought – up around 3% year on year.
If you look at the percentage year-on-year trend in retail sales, the trough was last autumn (when inflation peaked at over 5%) and the trend in the growth rate has been sharply upwards since. It’s easy to explain why: inflation has slumped, meaning headwinds facing the consumer has abated, and employment has surged. There are 335,000 more people earning money since last January, and with lower inflation they get to keep more of their income to buy discretionary items.
David Kern, chief economist at the British Chambers of Commerce
Retail sales made modest but satisfactory progress in July, with the monthly increase higher than expected. The 2.8% annual increase in retail sales volumes supports our belief that some of the pessimism surrounding the recent performance of the UK economy is unwarranted. This figure provides hope that in the third quarter of the year we will see some recovery in economic activity.
The further decline in high street inflation is also welcome news. This will support disposable incomes and consumer spending, at a time when austerity and the eurozone crisis continue to put the economy under pressure.
Despite the positive job market figures published this week, it is clear economic growth in the UK is still far too weak. The government must do much more to help businesses to grow and create jobs at a time when the public sector continues to shrink.
We need to see more measures to boost infrastructure and strengthen the construction sector, alongside forceful deregulation and moves towards the creation of a state-backed business bank. It is also important to ensure that the funding-for-lending scheme is made to work effectively so that credit-worthy businesses are able to grow.
Richard Lowe, head of retail and wholesale at Barclays
It will be some comfort to retailers that consumers are still spending, albeit more modestly than they would perhaps like. As the sector struggles to find sustained growth at home, more and more businesses are looking to expand overseas. Even smaller retailers are starting to spread their wings internationally with the help of the internet.
Chris Williamson, chief economist at Markit
The overall level of retail sales is now the highest ever. Importantly, the strong upward revision to June’s figure adds to recent evidence that the economy fared much better at the end of the second quarter than the Office for National Statistics had initially guessed.
Both industrial production and construction performed better in June than the ONS had pencilled-in when calculating its first estimate of second-quarter gross domestic product, suggesting GDP fell by 0.5% instead of 0.7%.
While the retail sales number is not included in the output measure of GDP, the better than expected sales growth in June adds to the view that the GDP numbers overstate the recent weakness of the economy. With the Queen’s jubilee thought to have hit GDP by 0.5%, the UK’s underlying health is more like one of flat-lining, and perhaps even very modest growth, rather than recession.
Whether the upturn will last remains uncertain. The CBI’s monthly distributive trades survey found that retailers had become increasingly pessimistic about August, with the indicator for expected sales dropping steeply from 32% to 3%, its lowest since April.
Meanwhile, inflation picked up again in July, which will have continued to squeeze consumer spending power. On the other hand, the labour market has shown a surprisingly strong recovery so far this year, which should help offset some of the income squeeze.