UK retail sales remain subdued but beat forecasts
UK retail sales were stronger than expected in July but strong food sales are continuing to mask wider weakness as consumers feel the pinch.
Total retail sales rose 0.3% for a second month, the Office for National Statistics revealed, beating the average economist estimate of 0.2%.
Retail sales excluding petrol increased 0.5% month-on-month in July, better than the consensus forecast for a 0.1% rise but down from the revised previous month's 0.6% rise.
Year-on-year sales swelled 1.5%, ONS said, down from the 2.8% revised figure from June but beating the expected 1.2% improvement. On a yearly basis sales including fuel rose 1.3%, down from the revised 2.8% a month ago but better than the 1.4% consensus forecast.
The underlying trend of sales over the last three months sees total sales up 0.6% compared to the 1.5% rise in the second quarter of 2017.
ONS senior statistician Ole Black said: "The underlying trend at the beginning of 2017 showed a relatively subdued picture in retail sales. Strong food sales have been responsible for the growth of 0.3% in July compared with June, as all other main sectors have shown a decrease. Whilst the overall growth is the same as in June, trends in growth in different sectors are proving quite volatile."
The quantity of retail sales increased by 0.3% compared with the previous month due to strong sales in food stores at 1.5%; recovering from a fall of 1.1% in June, while the amount spent on food rose 2.0%.
All other sectors except food and household goods stores declined on the month for the quantity bought in retail sales.
Textile, clothing and footwear stores saw volume fall 0.5% but the amount spent rose 0.9%.
A SIGN OF CONSUMER CRUNCH
The data provided further signs that households, squeezed by rising inflation and low growth in wages, are facing tougher spending choices and focusing more on essential spending, particularly food.
A report from Nielsen published overnight found more than 50% of Britons adjusting their spending behaviour between April and June, in the wake of the household cash squeeze.
Nielsen said 38% of respondents cited switching to cheaper grocery brands and 27% had worked to save on gas and electricity payments.
"Subdued retail sales growth in July reflected an ongoing deterioration in household finances, linked in turn to low pay, rising prices and concern about the outlook," said economist Chris Williamson at IHS Markit.
He said the data added weight to calls for the Bank of England to hold off with higher interest rates, as increased borrowing costs will add further pressure to family budgets.
The total rise of 0.3% "is a relatively lackluster start" to the third quarter, he said, suggesting sales are on a weakening trend, as indicated by the latest three months seeing sales up just 0.6% compared to 1.5% in the second quarter.
With the combination of low pay growth of 2.1% and inflation of 2.6% meaning average employee earnings are falling in real terms at an annual rate of 0.5% and likely to endure for a few months yet, Williamson said the squeeze on spending may well intensify before hopefully easing next year.
"Inflation should start to cool as we move into 2018 and pay growth should start to perk up amid historically low unemployment. However, much will depend on consumer confidence improving, which will in turn most likely hinge to a large extent on how Brexit negotiations affect the economic outlook.”
The evidence of the past few months has shown the appetite of British consumers to maintain spending momentum as much as possible, despite consumer sentiment having now dropped back to lows last seen in the aftermath of the Brexit vote, said economist Victoria Clarke at Investec, noting that the GfK consumer confidence index has dropped from -5 in January to -12 in July.
Clarke views inflation as closing in on its peak. "However before this peak is reached we do expect further rises over the months ahead and even after that for inflation to take time to moderate. With no material signs of a sustained shift up in wage growth, we see real household spending power remaining under pressure," she said.
"Hence our expectation is that as the household cash squeeze continues, sales volumes are likely come under pressure and, whilst not collapsing, should look pretty lacklustre to year-end. For economic momentum, this implies an ongoing drag from a consumer sector running at reduced speed."
Barclays noted that the retail sales deflator increased by 0.4% on the month but the yearly figure was stable at 2.7%, the lowest reading since February.
"With fuel price inflation coming down from double-digit annual growth rates recorded just three months ago, all components of the RSI are now displaying inflation rates between 2% and 3%, with food stores posting the strongest price increase and fuel the weakest."