Press release

25 Aug 2020 London, GB

CBI survey surprisingly indicates retail sales lost momentum in August after July’s jump – EY ITEM Club comments

After a decent stream of improved data and surveys raising optimism about the UK’s economic near-term recovery, the weaker August CBI distributive trades survey shows a more subdued result.

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Related topics Growth COVID-19
  • After a decent stream of improved data and surveys raising optimism about the UK’s economic near-term recovery, the weaker August CBI distributive trades survey shows a more subdued result. The survey shows a significant rise in job cuts in the retail sector, which will likely impact the recovery, especially after the furlough scheme ends in October
  • It is possible that the opening up of the consumer services sector in July diverted some consumer spending away from retail
  • The CBI’s sales balance relapsed to -6% in August, after improving markedly to +4% (the highest level since April 2019) in July from -37% in June. This follows data from the Office for National Statistics (ONS) which showed retail sales volumes rising a healthy 3.6% month-on-month in July and up 1.4% year-on-year, which had been the first annual gain since January
  • Even with this survey’s findings, overall indications are that consumer spending will see a substantial bounce back in Q3 after the contraction of 23.1% quarter-on-quarter in the second quarter
  • The full opening up of the retail sector is unleashing pent-up demand, while the opening up of the hospitality sector and other consumer services from early July is further fuelling consumer spending. This supports the EY ITEM Club’s belief that the economy is likely to see GDP growth of at least 12% quarter-on-quarter in Q3 and it could get up to around 15%
  • The August CBI survey is a reminder that there is considerable uncertainty as to just how willing and able consumers will be to spend further out
  • The EY ITEM Club predicts that consumer spending will be constrained after Q3 by cautious consumers and markedly higher unemployment. On top of this, if there is a significant spike in coronavirus cases over the coming months, it could magnify consumer caution and weigh on shopper footfall
  • However, low inflation should provide some support to spending, and the four months of net repayment of unsecured consumer debt totalling £15.7 billion over March–June has improved many households’ balance sheets. This is likely to help some consumers’ purchasing ability

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

“The CBI distributive trades survey unexpectedly showed retail sales losing momentum over the first half of August (the survey was carried out 28 July – 14 August) after ONS data showed healthy growth in July.

“The balance of retailers reporting year-on-year growth in sales volumes fell back to -6% in August after jumping 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).

“The CBI reported that retailers had indicated retail sales were, on average, 27% lower than in ‘normal’ conditions (i.e. in the absence of the pandemic) in July. However, this was a significant improvement on the last time this question was asked in June (-79%).

“The CBI reported that the decline in retail sales in August was broad-based across sectors, with only grocers, furniture & carpets, non-store and ‘other’ goods sales seeing growth.

“Internet sales grew at a rate broadly in line with their long-term average in August.

“The survey also reported that employment in the retail sector had fallen at the fastest rate since February 2009 in the year to August, with an even more significant fall expected in the next quarter. This reinforces the likelihood that the recovery will be held back by rising unemployment. It also fuels suspicion that the Chancellor may feel compelled to take further steps to support the labour market in the Autumn Budget.

“Investment intentions are also negative, with a balance of -32% expected to raise investment in the year ahead, although this is at least an improvement on the -55% balance in the May survey.”

Retail sales saw robust growth in July, especially compared to April’s low as restrictions eased

Howard Archer continues: “The latest data from the ONS shows that retail sales volumes increased a healthy 3.6% month-on-month in July; this resulted in a gain of 1.4% year-on-year, which was the first annual gain since January. Furthermore, retail sales volumes in July were 3.0% above their February level - before the sector was impacted in March by the pandemic and, especially in April by the lockdown.

“Retail sales clearly benefitted in July from a full month of non-essential retailers being allowed to open (they were allowed to open from mid-June after being closed from 23 March). Retail sales were also likely helped in July by the opening up of pubs, restaurants and hairdressers pushing up footfall. However, the opening up of the hospitality sector and other consumer service sectors may have diverted some consumer spending away from retail sales towards services.

“With July’s decent rise of 3.6% in retail sales volumes following double-digit month-on-month gains in both June (14.0%) and May (12.3%) after April’s record drop of 18.1%, sales volumes were up 6.1% in the three months to July compared to the April.”

Outlook

Howard Archer adds: “Despite the disappointing August CBI survey, the overall impression is that consumer spending is headed for a substantial rebound in the third quarter after contracting a record 23.1% quarter-on-quarter in the second quarter. The full opening up of the retail sector is unleashing pent-up demand, while the opening up of the hospitality sector and other consumer services from early July is further fuelling consumer spending. Spending on meals also appears to be getting a significant lift in August from the Chancellor’s “Eat Out to Help Out” scheme. This supports the EY ITEM Club’s forecast that the economy is likely to see GDP growth of at least 12% quarter-on-quarter in the third quarter, if not more.

“However, the weaker-than-expected August CBI survey is a reminder that there is considerable uncertainty as to just how willing and able consumers will be to spend beyond the third quarter. Persistent consumer caution is seen as a significant risk that could limit the UK recovery.

Howard Archer continues: “The fundamentals for consumers have taken a clear 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 730,000 over April-July (according to Pay as You Earn Real Time Information data) – while others will be concerned that they may still end up losing their job once the furlough scheme ends in October.

“There is clearly a very real likelihood that unemployment will rise markedly once the furlough scheme ends. The EY ITEM Club suspects the unemployment rate could get up to around 8.5% by year end compared to the latest rate of 3.9% in the three months to June.

“Additionally, many incomes have been affected; the latest ONS data shows average earnings fell 1.5% year-on-year in June. However, in good news for consumers, inflation is low, and dipped to a near four-year low of 0.5% in May. Although inflation rose back up to 1.0% in July, the EY ITEM Club suspects that it could fall to a low of 0.2% over the next few months. Even so, ONS data shows that real earnings fell 2.2% year-on-year in June itself and were down 2.0% year-on-year in the three months to June.

“Furthermore, consumers may very well adopt a cautious approach to major discretionary purchases given the uncertain economic environment and heightened job insecurity. Consumer confidence currently remains at a relatively low level despite coming off recent long-term lows.

“On top of this, if there is any marked spike up in coronavirus cases over the coming months, it could magnify consumer caution and weigh on shopper footfall.

“On a positive note, four months of net repayment of unsecured consumer debt totalling £15.7 billion over March–June has improved many households’ balance sheets, which will help some consumers’ purchasing ability.”