Press release

19 Jun 2020 London, GB

UK retail sales well off April lows in May as some restrictions eased; Further easing set to help June performance – EY ITEM Club comments

Retail sales volumes came well off their April lows in May as there was a modest easing of restrictions facing the sector; household goods stores’ sales were up 42.0% month-on-month in May.

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  • Retail sales volumes came well off their April lows in May as there was a modest easing of restrictions facing the sector; household goods stores’ sales were up 42.0% month-on-month in May
  • Nevertheless, retail sales were still hampered in May by restrictions remaining in place for much of the sector, notably including non-essential retailers. Retail sales volumes rose 12.0% month-on-month in May after dropping a record 18.0% in April but were still down 13.1% year-on-year. The ONS also reported that sales volume in May were 13.1% below their February level
  • Retail sales volumes excluding fuel were up 10.2% month-on-month but down 9.8% year-on-year in May. Although fuel sales were up, the ONS reported that fuel sales in May were 42.5% below their February level
  • Online sales as a share of total retail sales rose to a new record high of 33.4% in May from 30.7% in April
  • May’s 12.0% month-on-month rise in retail sales volumes reinforces belief that the economy picked up modestly in May from a low-point in April when GDP fell 20.4% month-on-month. Nevertheless, it is evident that the economy was still significantly affected by lockdown restrictions which only began to ease in the middle of the month
  • While the retail sector will benefit from the progressive opening of the sector in June, it is highly uncertain just how much the sector will bounce back
  • While there may well be a significant initial element of pent-up demand at some retailers following their re-opening, further out, the upside for retailing could be capped by cautious consumers
  • The EY ITEM Club suspects that consumer spending will contract by around 17% quarter-on-quarter in the second quarter, acting as a major factor in expected GDP contraction around 15% quarter-on-quarter
  • While consumer spending is expected to play a significant role in the economy’s recovery from the third quarter, the EY ITEM Club suspects that the upside will be limited by higher unemployment and reduced pay. On the positive side, very low inflation and consumers paying off a record amount of debt in March and April could provide some support to spending

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

“Retail sales volumes rose 12.0% month-on-month in May, following a record drop of 18.0% in April, when sales had been affected by the full impact of the COVID-19 lockdown. April saw the closure of the entire retail sales sector except for essential retailers. Retail sales volumes had earlier declined 5.2% month-on-month in March when sales had only been affected by just over a week from the lockdown.

“Retail sales volumes came well off their April lows in May due to some easing of lockdown restrictions, allowing garden centres and homeware shops to open in England from the middle of the month. The British Retail Consortium (BRC) reported that the year-on-year decline in retail footfall narrowed modestly to a still substantial 81.6% in May from the record 84.7% drop seen in April.

“The year-on-year decline narrowed to 13.1% in May from 22.7% in April. The ONS also reported that sales volumes in May were 13.1% below their February level. Sales volumes were also down 12.8% on a three-month/three-month basis in May.

“Household goods stores led May’s improvement in sales, jumping 42.0% month-on-month as they benefited from garden centres and homeware shops re-opening.

“Retail sales excluding fuel were up a modest 10.2% month-on-month in May but down 9.8% year-on-year. A slight easing of the lockdown led to a modest pick-up in private transport journeys. Nevertheless, the ONS reported that fuel sales in May were 42.5% below their February level.

“Online sales as a share of total retail sales rose to a new record high of 33.4% in May from 30.7% in April, partly making up for lost sales in the shops.

“Food sales edged down 0.3% month-on-month in May but levels were still reported to be high after recent strong growth.

“The annual retail sales deflator fell 1.5% year-on-year in May, primarily due to fuel prices being down 15.7% year-on-year. This followed a drop of 0.6% year-on-year in April, when fuel prices had been being down 11.5% year-on-year.

“Excluding fuel prices, the annual retail sales deflator edged up just 0.1% in May after rising to 0.6% in April from 0.3% in March and 0.2% in February.”

Outlook

Howard Archer adds: “The retail sector will benefit appreciably from the progressive opening up of the sector in June – car showrooms and open markets were allowed to open on 1 June, while non-essential retailers were allowed to open from 15 June, subject to them meeting strict safety measures and social distancing guidelines.

“However, it is highly uncertain just how much the sector will bounce back.

“While there may well be a significant initial element of pent-up demand at some retailers, further out, the upside for retailing may well be capped by cautious consumers.

“Indeed, Springboard data suggests that the overall pick-up in shopper footfall since the re-opening of non-essential retailers on Monday has been limited and has fallen back from after a reasonable gain on the first day of opening.

“The current fundamentals for consumer spending have been affected as a result of coronavirus, and they are likely to remain under pressure in the near term at least. Many people have already lost their jobs despite the supportive government measures – as was highlighted by employment falling by 621,000 over April/May (according to Pay as You Earn Real Time Information data) – while others will be worried that they may still end up losing their job once the furlough scheme ends in October. Additionally, many incomes have been affected. The latest ONS data show average earnings fell 0.9% year-on-year in April. One bright spot for consumers is that inflation slowed to just 0.5% in May, the lowest level since June 2016. The EY ITEM Club suspects that inflation could get down to 0.2% over the next few months. Even so, ONS data shows that real earnings fell 1.7% year-on-year in April itself and were down 0.4% year-on-year in the three months to April.

“Consumers are likely to adopt a very cautious approach to discretionary purchases given the uncertain economic environment. Consumer confidence currently remains near record low levels, with the majority of measures reporting most consumers are not seeing it as a good time to make major purchases. GfK reported that consumer confidence in late May weakened to the lowest level since January 2009, although there was a pick-up in sentiment over the first half of June.

“On a positive note, a substantial net repayment of unsecured consumer credit in both March (£3.8 billion) and April (a record £7.4 billion) has improved many households’ balance sheets. This will improve some consumers’ purchasing ability.

“The EY ITEM Club suspects that consumer spending will contract by around 17% quarter-on-quarter in the second quarter of this year, acting as a major factor in expected GDP contraction around 15% quarter-on-quarter.”