Press release

20 Feb 2020 London, GB

Healthy rise in January UK retail sales suggests improved consumer confidence temporarily lifts willingness to spend

This is decent news for first quarter growth prospects as retail sales volumes rose a healthy 0.9% month-on-month in January.

Press contact

Annabel Banks

EY UK&I Media Relations Manager

A highly experienced communications professional with cross-sector experience in media relations having worked with global brands spanning elite professional services firms to digital start-ups.

Related topics Growth
  • This is decent news for first quarter growth prospects as retail sales volumes rose a healthy 0.9% month-on-month in January. This was the largest increase since last March. Furthermore, sales volumes excluding fuel sales were up 1.6% month-on-month in January, the best performance since May 2018. This raises hopes that the improvement in consumer confidence seen since December’s General Election result is translating into increased spending.
  • January’s rise in retail sales follows a particularly poor performance over the latter months of 2019, when consumers seemed to be particularly cautious amid heightened domestic political and Brexit uncertainties. Retail sales volumes fell 0.9% quarter-on-quarter over the fourth quarter of 2019, with December’s drop of 0.5% month-on-month marking the fourth time in five months that retail sales had fallen.
  • Consequently, retail sales volumes were only up 0.8% year-on-year in January and were still down 0.8% on a three-month/three-month basis. Excluding fuel sales, the year-on-year increase was 1.2%.
  • The Bank of England is likely to see January’s healthy rise in retail sales as evidence that the economy is seeing improvement early on this year and consistent with its decision not to cut interest rates at its late-January meeting. 
  • When considering growth prospects, a key factor will be if this improvement in confidence will be sustained, and if it will continue to translate into greater willingness to spend on a sustained basis.
  • The fundamentals for consumers are likely to be pretty decent over the coming months with employment high and real earnings growth at a reasonable level. Indeed, employment rose 180,000 in the three months to January to be at a record high of 32.934 million while real earnings growth was a respectable 1.4%. Nevertheless, earnings growth has moderated since mid-2019 and we suspect that employment growth will likely be lower overall in 2020 than in 2019.
  • Some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April. The Budget could also well contain other supportive measures, including raising the threshold for paying national insurance.
  • Moderate inflation should also be helpful to consumers over 2020. While it spiked to a six-month high of 1.8% in January from a 37-month low of 1.3% in December, it still looks likely to trend back down to around 1.3% by mid-2020 and we expect it to average a modest 1.5% over 2020.
  • There are factors which may limit the consumer spending. In particular, with uncertainties far from over and the savings ratio still relatively low, many consumers may be keen to avoid dissaving. Meanwhile, lenders have reduced the availability of unsecured consumer credit and tightened lending standards. 

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“Pretty encouraging news for first quarter growth prospects as retail sales volumes rose a healthy 0.9% month-on-month in January. This was the largest rise since March 2019. Furthermore, sales volumes were up 1.6% month-on-month excluding fuel sales – the best performance since May 2018. This raises hopes that the improvement in consumer confidence seen since December’s election is translating into increased spending.

“January’s rise in retail sales follows a particularly poor performance over the latter months of 2019 when consumers seemed to be particularly cautious amid heightened domestic political and Brexit uncertainties. Indeed, retail sales volumes fell 0.9% quarter-on-quarter over the fourth quarter of 2019 with December’s drop of 0.5% month-on-month marking the fourth time in five months that retail sales had fallen.

“Consequently, retail sales volumes were only up 0.8% year-on-year in January. Excluding fuel sales, the year-on-year increase was 1.2%.

“Furthermore, retail sales were still down 0.8% in the three months to January compared to the three months to October.

“Fuel sales plunged 5.7% month-on-month in January and were down 3.2% year-on-year. This was attributed to higher fuel prices.

“Elsewhere the picture was more encouraging. Sales in non-food stores rose 1.3% month-on-month in January although they were only flat year-on-year. Sales of textiles and clothing jumped 3.9% month-on-month although there was a 1.1% month-on-month in household goods sales.

“Sales at department stores rose 1.6% month-on-month in January.

“Food sales jumped 1.7% month-on-month, although they were down 0.3% year-on-year in January.

“Online sales rose 0.9% month-on-month in January and were up 4.9% year-on-year

The annual retail sales deflator rose to a 13-month high of 1.1% in January from 0.3% in December and November from just 0.1% in October, which was the lowest level since October 2016. However, this was lifted appreciably by higher fuel prices. Excluding fuel prices, the annual retail sales deflator rose to a six-month high of 0.7% in January from 0.3% in December.

Outlook for consumer spending

“January’s healthy rise in retail sales raises hopes that a marked rise in consumer confidence following December’s decisive General Election has at least temporarily lifted their willingness to spend.

“This is evident in a number of surveys. GfK reported consumer confidence rose to a 16-month high in January from November's equal lowest level for 2019 (and since mid-2013). Additionally, the February IHS Markit’s household finance index showed consumers were the most upbeat about their finances since the survey began 11 years ago.

“A key factor for growth prospects is will this improvement in confidence continue and will it translate into greater willingness to spend on a sustained basis?

“The fundamentals for consumers are likely to be pretty decent over the coming months with employment high and real earnings growth at a reasonable level. Indeed, employment rose 180,000 in the three months to January to be at a record high of 32.934 million while real earnings growth was a respectable 1.4%.

“Nevertheless, earnings growth has moderated since mid-2019 and we suspect that employment growth will likely be lower overall in 2020 than in 2019.

“Latest data show average annual earnings growth moderated to 2.9% in the three months to December (compared to an 11-year high of 3.9% in the three months to July 2019) with regular earnings growth at 3.2% and we suspect it is likely to stabilise around 3.2%. Despite consumer price inflation dipping to a 37-month low of 1.3% in December, ONS data indicated that real earnings growth moderated to 1.4% in the three months to December after rising to 2.0% in the three-months to June 2019 from just 0.1% in the three months to June 2018. The recent moderation in regular earnings growth has been less pronounced; it was 1.8% in the three months to December compared to a peak of 2.0% in the three months to June.

“Disappointing news for consumer purchasing power saw consumer price inflation spike to a six-month high of 1.8% in January from a 37-month low of 1.3% in December, but it still looks likely to trend back down to around 1.3% by mid-2020 and we expect it to average a modest 1.5% over 2020.

“Some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April. The Budget could also well contain other supportive measures, including raising the threshold for paying national insurance.

“There are other factors which may limit the consumer spending. In particular, with the savings ratio relatively low, many consumers may be keen to avoid dissaving. Additionally, lenders have become more careful about advancing unsecured credit.”