Weak Retail Sale Fuels Fear Of Economic Slowdown

  • Jun 21, 2019 BST
  • Team Kalkine
Weak Retail Sale Fuels Fear Of Economic Slowdown

After an unseasonably cold May prompted a sharp decline in summer clothing sales, UK retail sales fell in May for a second month running, after a strong start to the year. According to data released by the Office for National Statistics on Thursday, the volume of goods sold in stores and online declined by 0.5 per cent in May compared with the previous month, the biggest decline in spending this year. Initially, the analysts had speculated that shoppers seemingly had shrugged off Brexit fears earlier in 2019, but the drop in British retail sales added to evidence that the economy is losing momentum and is set for a weak second quarter. After a strong expansion in March, it was followed by a 0.1 per cent drop in retail sales in April and was in line with market expectations.

Retail Sales collects turnover data from retailers and is widely regarded as an indicator of consumer spending. The latest data is for the four-week period 28 April 2019 to 25 May 2019 and presents estimates of the quantity bought and amount spent in the retail industry. While a low reading is regarded as bearish or negative for the Pound and economic growth, a high reading is seen as bullish or positive. The Office for National Statistics also releases the Retail Sales Index (RSI), which measures the value and volume of retail sales in Great Britain on an average weekly basis, and is an important economic indicator and one of the earliest short-term measures of economic activity. To assist in informed decision- and policy-making, it is widely used by private and public sector institutions for the compilation of the national accounts.

The Office for National Statistics said that unseasonably cold weather hit demand for clothing and footwear sales, which fell 4.5% on the month to register the biggest drop since July 2015, while, in the three months to May 2019, the quantity bought in retail sales increased by 1.6% when compared with the previous three months, as it still benefits from the particularly strong gain in sales in March. Growth was seen in all stores except department stores and household goods stores, as quantity bought in department stores marked the eighth consecutive period of contraction to decline by 0.9 per cent in the three months to May. As the department stores have seen no growth since September of last year, the eighth consecutive month of contraction in this sector was the longest since the financial crisis.

Economists have said that even after allowing for cool weather hitting clothing sales in May, the underlying performance in retail sales looks softer, as the monthly growth rate for both the amount spent and the quantity bought fell by 0.3% and negative 0.5% respectively. Retail sales excluding auto fuel declined by 0.3 per cent as compared to the previous month, while the value spent on it fell by 0.1 per cent. Non-food sales volumes fell 0.5% month-on-month in May and were up a modest 0.9% year-on-year, and Food sales dipped 0.1% month-on-month in May and were up just 0.3% year-on-year. There was a 2.2% increase in sales of household goods, but non-store retailing fell 0.2% month-on-month in May. After slowing to just 0.2% in April (the lowest level since November 2016), the annual retail sales deflator rose back up to 0.4% in May. Excluding motor fuels, the annual deflator increased by 0.1 per cent in May. The growth in May was followed by a decline of 0.2% year-on-year in April, which had marked the first yearly decline since November 2016.

Helped by improved purchasing power and elevated employment, consumers had largely brushed off Brexit concerns so far in 2019 and had been largely resilient. But analysts now believe that as a consequence of a highly uncertain domestic economic and political environment amid prolonged Brexit uncertainties, the recent dip in retail sales will likely fuel suspicion that consumers could become more cautious and limit their spending over the coming months. Also, the recent improvement in consumer fundamentals seen at the starting of the year is now expected to level off. Moreover, many markets analysts believe that the economy is headed for a sharply weakened performance in the second quarter, as predicted by the Bank of England in its latest policy meeting, after the weak shopping data in April and May. Further, it has fuelled worries that the UK economy is entering a period of sluggish growth, with some even predicting that GDP may contract slightly in the second quarter. After the economy had contracted by 0.4% month-on-month in April, the month of May seems to have been a very challenging for the economy. In April, as the positive effect of stockpiling that occurred in the first quarter amid heightened Brexit uncertainties waned off and the manufacturing sector was hit hard by car producers bringing forward their summer shutdowns, a contraction was reported.

However, not all market experts have a downbeat expectation after the data, with some believing that this is not a sign of weaker consumer confidence, but shows vulnerabilities the sector faces from short-term factors, like weather and national events. Given increasing net store closures, many believe that high street must reinvent itself to give consumers more reasons to visit. Real earnings growth picked up between mid-2018 and early-2019, which augurs well for retailers and consumer spending prospects. As earnings growth reached 3.5% in the three months to February (the best level for a decade and up from 2.4% in mid-2018) and inflation trended fell as low as 1.8% in January, real earnings growth reached 1.6% in the three months to February. This was up from just 0.1% in mid-2018 and was the best level since mid-2016. Further, employment saw strong growth in late-2018 and early 2019, further providing a boost to the ability to seek higher wages, an in the three months to April, the UK unemployment rate was at its lowest since 1974. Although consumer confidence, compared with its long-term average, remains low, it improved marginally in May.

Although earnings continue to outstrip inflation, the second decline in as many months will serve as a painful reminder that consumers are starting to tighten their belts after driving the economy last year, in contrast to businesses. As the economy is struggling with the Brexit crisis as well as a slowdown in growth globally, the downturn in retail sales does not bode well for an overall increase in the second quarter for the economy. Moreover, real earnings growth eased back to 1.4% in the three months to March and 1.2% in the three months to April, further prompting questions whether the recent improvement in consumer spending power will continue as the labour market and earnings growth may be increasingly affected in the near term. Additionally, employment growth has been slowing recently, with the three months to April being the slowest since last August, and several recent surveys suggest pay awards could be levelling off after recent improvement, despite some pickup in earnings in April.

It must be noted that, compared to past norms, consumer purchasing power is still low, despite its recent overall improvement. As companies tailor their behaviour a challenging global environment, prolonged Brexit uncertainties, an unsettled domestic political situation and a lacklustre domestic economy, hiring might come under stress, further exacerbating the slowdown in spending. Though lenders have cut back on the availability of unsecured consumer credit, consumers might be inclined to avoid further dissaving, given current significant uncertainties and very low savings ratio. Private consumption in the country accounted for 67.5% of its Nominal GBP in December 2018, highlighting the importance consumer spending plays in driving the economic growth, especially at a time when the business investment has been cut down.  It is now more important that businesses look overseas for exports to diversify the risk that a weak economy would weaken sales. Moreover, experts reckon the fundamentally, households currently have the means to spend more.

The retail industry has seen a string of high-profile failures among bricks-and-mortar retailers off late, and other retailers themselves have reported mixed fortunes lately. While fashion brand Ted Baker this month reported a difficult start to the year, Dixons Carphone, the biggest seller of electricals and mobile phones in the country, reported a 22% fall in full-year profit. It also warned of another big decline in the current year as mobiles sales have declined in a tight domestic market. However, bucking a tough retail market, online fashion group Boohoo reported strong growth in sales.

Last year saw the disappearance of Toys R Us, Maplin and Poundworld as physical retailers have been hit by a combination of broader economic problems, rising costs, unseasonably warm weather and changing habits. In terms of habits, shoppers are switching to buying online and are seeking to rent rather than buy as more people live in smaller homes. The economic and political uncertainty that has dampened consumer confidence have coincided with rising labour and product costs, partially fuelled by Brexit and weaker Sterling. Retailers are expected to face a tough year ahead.

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