- The CBI’s sales balance rose to a 15-month high of +4% in July from -37% in June, -50% in May and an equal record low of -55% in April
- The improved July CBI survey follows on from hard data showing that retail sales saw a second month of improvement in June (when they rose 13.9% month-on-month) as they benefitted from non-essential retailers being allowed to open in England from the middle of the month
- Despite the recent pick-up in retail sales, with the easing of restrictions likely helping to release pent-up demand, there is uncertainty as to just how willing consumers will be to spend over the coming months. Ongoing concerns over COVID-19 may weigh on footfall. Persistent consumer caution is seen as a significant risk that could limit the UK recovery
- The CBI survey indicates that retailers are relatively wary about the near-term prospects for sales with a balance of -5% expecting volumes to be higher year-on-year in August
- The EY ITEM Club expects improved consumer spending amid eased lockdown restrictions to enable the economy to grow by around 12% quarter-on-quarter in the third quarter following estimated contraction of 20% quarter-on-quarter in the second quarter
- While consumer spending is expected to play a significant role in the economy’s return to growth in the third quarter, the EY ITEM Club suspects that the upside will be constrained by higher unemployment and limited pay
- Positively, very low inflation should provide some support to spending. Meanwhile, three months of net repayment of unsecured consumer debt totalling £15.8 billion over March–May has improved many households’ balance sheets which will help some consumers’ purchasing ability
- Growth is likely to slow in the fourth quarter as unemployment rises. The EY ITEM Club expects GDP to contract 11.5% over 2020. The EY ITEM Club sees GDP growth at 6.5% in 2021 as the recovery is limited by persistent consumer caution, higher unemployment and only slowly recovering business investment
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The CBI distributive trades survey showed a significant pick-up in retail sales over the first half of July (the survey was carried out 26 June – 15 July) as the sector benefitted from a further easing of lockdown restrictions from 4 July.
“The balance of retailers reporting year-on-year growth in sales volumes rose to +4% in July – the best level since April 2019 – from -37% in June, -50% in May and -55% in April (which had matched the record low seen in December 2008.
“A balance of 0% of retailers said sales in July were average for the time of year. This was a notable improvement on the negative balances for June (-34%) and May (-48%).
“The CBI reported that the improvement in the sales balance in July was primarily due to stronger grocery sales. Additionally, the CBI revealed that “sales of hardware & DIY products and other normal goods (cards, flowers, stationary) returned to growth in the year to July. Although most other retailers (e.g. clothing, footwear and department stores) continued to report significant declines, in some cases falls were less severe than in recent months.”
“Online sales continued to post above average performance in July despite the progressive opening of the retail sector and easing of lockdown restrictions. Online sales as a share of total retail sales only dipped to 31.8% in June after rising to a new record high of 33.3% in May from 30.7% in April. This compares to a share of 20.0% in February.
“The survey indicated that retailers are still relatively wary about near-term sales prospects despite the easing of lockdown restrictions. A balance of -5% expect sales to be higher year-on-year in August.”
Retail sales saw further pick-up in June from April low as restrictions eased
Howard Archer continues: “Latest data from the Office for National Statistics show that retail sales volumes saw further improvement in June after coming well off their April lows in May as they benefitted from non-essential retailers being allowed to open in England from the middle of the month. Sales had earlier been helped in May by garden centres and homeware shops being allowed to open in England from the middle of the month.
“Retail sales volumes rose 13.9% month-on-month in June; this followed a rebound of 12.3% month-on-month in May after volumes had contracted a record 18.0% in April when the lockdown was fully in force through the month. The year-on-year drop in retail sales volumes narrowed to just 1.6% in June from 13.0% in May and a record 22.8% in April.
“Furthermore, retail sales volumes in June were only 0.6% below their February level.
“Despite June’s improvement, retail sales volumes contracted a record 9.5% quarter-on-quarter over the second quarter. The EY ITEM Club suspects that consumer spending contracted by around 20% quarter-on-quarter in the second quarter, thereby being a major factor in likely GDP contraction around 20% quarter-on-quarter.”
Howard Archer comments: “Despite the recent pick-up in retail sales with the easing of restrictions likely helping to release pent-up demand, there is uncertainty as to just how willing consumers will be to spend over the coming months. Persistent consumer caution is seen as a significant risk that could limit the UK recovery.
“Indeed, while there does seem to have been a pick-up in consumer spending in the first half of July according to the CBI survey, it also appears that consumers are still relatively cautious amid heightened job insecurity. Households appear focused on reining in debt and supporting their savings where possible.
“The fundamentals for consumer spending have taken a downturn 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 649,000 over April-June (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 furlough schemes covers wages up to 80% of their normal level); latest ONS data show average earnings fell 1.2% year-on-year in May. Recent good news for consumers is that inflation was limited to 0.6% in June (it was even lower at 0.5% in May, the lowest level since June 2016). The EY ITEM Club suspects that inflation could get down to 0.1% over the next few months. Even so, ONS data show that real earnings fell 1.9% year-on-year in May itself and were down 1.3% year-on-year in the three months to May.
“Furthermore, consumers are likely to adopt a cautious approach to discretionary purchases given the current uncertain economic environment. Consumer confidence remains at a relatively low level despite coming off recent long-term lows. On top of this, ongoing concerns over coronavirus may limit shopper footfall.”
Howard Archer adds: “On a positive note, three months of net repayment of unsecured consumer debt totalling £15.8 billion over March–May has improved many households’ balance sheets, which will help some consumers’ purchasing ability.”