A visible loss of momentum in the retail sector – heavy snow only partly responsible for January’s poor performance, says ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s retail sales figures:
  • A nasty surprise in the context of relatively stronger survey data
  • But the weakness in sales volumes can be partly explained by the snow. And the deflators for food sales look odd
  • The struggle in the retail sector is likely to continue in the near-term, but we are more optimistic about prospects further out

A rather nasty surprise for retail sales in January, given the relatively positive evidence from survey data. While some of the weakness is probably because of the heavy snow towards the end of the month, this follows a visible loss of momentum in the retail sector over the second half of 2012.

“Food was the main factor behind the overall decline. This in turn seems to be a function of the sharp rise in food prices, although an annualised 7% rise in food prices looks questionable, even in the context of rising global food prices. It may well be that sales volumes are understated somewhat.

“Although the pace of decline in real earnings has eased compared to this time last year, household finances remain under pressure. With inflation expected to increase further in the coming months and wage growth going nowhere, consumers’ spending power is likely to remain constrained in the near-term.

“However, we are more optimistic for the future. As inflation begins to ease and the labour market strengthens, we expect a gradual recovery to materialise in the consumer sector towards the second half of the year.”