UK retail recession watch: Royal Wedding hangover

Posted by Neil Hume on Jun 16 10:47.

UK retail sales figures are out and they have managed to undershoot expectations.

The City was braced for a fall for May as consumers put their hands back in their pockets after splashing out in April (because of the good weather, the Royal Wedding, and the late Easter).

But not as big as this. Via Reuters:

UK MAY RETAIL SALES INC. FUEL -1.4% MM, +0.2% YY, (CONS. -0.6% MM, +1.5% YY), BIGGEST MM DROP SINCE JAN

UK MAY RETAIL SALES EX FUEL -1.6% MM, UNCH YY, (CONS. -0.6% MM, +1.8% YY)

UK MAY RETAIL SALES INC. FUEL +0.1% 3MTH/3MTH, +1.1% 3MTH VS YEAR AGO

UK MAY RETAIL SALES DEFLATOR +3.8% YY VS +3.7% YY IN APRIL

ONS-RETAILERS SAY CONSUMERS CUTTING BACK DUE TO WORRIES OVER ECONOMY, RISING FUEL PRICES, UNCERTAINTY OVER JOBS, PAY

ONS MONTHLY DROP DRIVEN BY 3.7 PCT FALL IN FOOD STORE SALES, BIGGEST FALL SINCE JUNE 2008

Of course, to get a reliable picture of the underlying trends is probably better to focus on the 3month/3month rate, as well as the deflator.

Nonetheless, today’s report is a cause for concern. Consumers are clearly spooked by a combination of higher petrol prices, rising household utility bills, food prices, public sector job cuts and a stagnant housing market. As such, the UK is probably looking at zero consumption growth this year.

And that’s bad news given the importance of consumer spending for the UK economy, says Howard Archer of IHS Global Insight:

The 1.4% drop in retail sales in May more than outweighed the 1.1% jump in April. This is particularly worrying for second quarter GDP growth prospects given that consumer spending accounts for 65% of GDP.

The squeeze on consumers’ purchasing power has been highlighted once again this week by data showing that consumer price inflation remained at 4.5% in May which was substantially above average earnings growth around 2.0% in April. Furthermore, the retail price deflator climbed to a 32-month high of 3.8% in May from 3.7% in April

The only positive – if that’s what you can call it – is that Bank of England has another reason to keep rates on hold.

Then again…

… could May’s weakness be explained by the farcical Olympic tickets sale process? Nomura seems to think so. Although it’s not much more positive than Archer on the rest of the year.

With household income diverted toward this, less was available for conventional retail sales. With retail sales worth about £25.6bn in May and Olympic ticket sales worth nearly £0.5bn, this is clearly not an insignificant effect. Abstracting from the Royal Wedding distortion and treating the Olympics tickets as retail sales, as some commentators mistakenly believed they were, we think volume growth would have been about 1.5% m-o-m.

But clearly this is not a reflection of underlying sales in the sector, which are not much better than flat. In June, the hangover from the wedding should have cleared and most of the Olympic strength budget squeeze should have passed, probably causing a marginal increase in volumes. However, the squeeze on household incomes from high inflation and subdued wage growth is unlikely to ease much in 2011 and should thus continue to constrain sales…

Related link:
Why the British economy is in very deep trouble – FT Alphaville

This entry was posted by Neil Hume on Thursday, June 16th, 2011 at 10:47 and is filed under Capital markets. Tagged with ONS, retail sales, Royal Wedding, UK.

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: