Heavy discounting keeps retail sales volumes elevated in July – ITEM Club

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  • Retail sales have held up reasonably well in July
  • But heavy discounting seems to be the main factor keeping volumes elevated
  • The fundamentals underpinning consumer spending are still unsupportive, although conditions are likely to improve as inflation slows further

Nida Ali, economic advisor to the EY ITEM Club, comments on today’s retail sales figures:

“Retail sales have held up reasonably well in July, especially on the back of robust increases in the previous two months. The large upward revision to June is also good news as it implies a further source of upward revision to Q2 GDP, on top of what we already know about production and construction. With sales volumes in July well above the Q2 average, we are also likely to see a strong contribution to growth in the third quarter.

“However, prices fell sharply in July, after another steep decline in June, suggesting that retailers are continuing to discount heavily. This seems to be one of the main reasons why sales volumes have held up, but this is clearly an unsustainable strategy as there is a limit to the extent to which retailers' profit margins can be squeezed.” 

Mark Gregory, EY’s chief economist added:

“The fundamentals underpinning consumer spending remain unsupportive. Although the labour market has improved markedly over the first half of the year, unemployment is still elevated well above historical norms. Meanwhile, inflation continues to run almost 1% ahead of wage growth, meaning that consumers’ purchasing power is still being squeezed. We do expect these conditions to improve gradually as inflation slows and the economy recovers, but for the moment underlying conditions remain tough.”