Press release

21 Aug 2020 London, GB

UK retail sales saw further marked improvement in July, benefitting from reduced restrictions – EY ITEM Club comments

Retail sales volumes saw further improvement in July of 3.6% month-on-month, as the sector benefitted from a full month of non-essential retailers being allowed to open.

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Related topics Growth COVID-19
  • Retail sales volumes saw further improvement in July of 3.6% month-on-month, as the sector benefitted from a full month of non-essential retailers being allowed to open
  • Retail sales volumes were up 1.4% year-on-year in July, the first annual gain since January. They were also 3.0% above February’s level
  • 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. This certainly contributed to a falling back in food sales in July as people visited restaurants and pubs
  • Online sales remain significantly higher than they were before the pandemic, however, the opening up of the retail sector has led to a fall back in online sales’ share of total sales from the record high seen in May, with a dip in volume in July
  • With July’s 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
  • Consumer spending looks on course 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. 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 the third quarter and it could get up to around 15%
  • However, despite a likely rebound in consumer spending in the third quarter, which will contribute to the economy returning to significant growth, there is considerable uncertainty as to just how willing and able consumers will be to spend going forward
  • The EY ITEM Club suspects that the upside for consumer spending will be constrained after the third quarter by cautious consumers, higher unemployment and limited pay. On top of this, if there is any marked increase in coronavirus cases over the coming months, consumer caution could rise and weigh on shopper footfall
  • On the positive side, low inflation should provide some support to spending. 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

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

“Retail sales volumes increased a decent 3.6% month-on-month in July; this resulted in a gain of 1.4% year-on-year, the first since January. Furthermore, retail sales volumes in July were 3.0% above their February level, before they were impacted in March and, especially, April by the lockdown.

“Retail sales clearly benefitted in July from a full month of non-essential retailers being allowed to open, pubs, restaurants and hairdressers, all 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.

“July’s gain of 3.6% in retail sales volumes followed an increase of 14.0% month-on-month in June, when sales benefitted from non-essential retailers being allowed to open in England mid-month. There had earlier been a gain of 12.3% in May when garden centres and homeware shops were allowed to open in England from the middle of the month. In contrast, retail sales volumes had fallen a record 18.1% month-on-month in April, following the lockdown restrictions imposed on 23 March. This notably included the closure of the entire retail sales sector except for essential retailers.

“With July’s rise in retail sales building on the rebound in June and May, volumes were up 6.1% in the three months to July compared to the three months to April.

“Retail sales excluding fuel were up 2.0% month-on-month in July and up 3.1% year-on-year. There was some pick-up in fuel sales as a further easing of the lockdown led to an increase in private transport journeys. Fuel sales rose 26.2% month-on-month in July but were still 11.7% below their February levels.

“Online sales fell 7.0% month-on-month in July as people returned to the shops but were still 50.4% above their February level.

“While the opening up of the retail sector has led to some decline in online sales’ share of total sales from the record high seen in May, they remain significantly above the levels seen before coronavirus started to impact, and the suspicion is that there will have been some permanent shift to online sales. Online sales as a share of total retail sales dipped to 28.9% in July from 31.8% in June and a record high of 33.3% in May. This compares to a share of 20.0% in February.

“Non-store retailing fell 2.1% month-on-month in July as retailers re-opened, but they were still 49.2% higher than they had been in February.

“Sales of non-food stores rose 10.0% month-on-month in July, reflecting the full month of non-essential retailers being allowed to open. However, volumes were still 6.6% below their February levels.

“Clothing stores rose 11.9% month-on-month in July, but were still 25.7% below their February level as they had been particularly impacted by the lockdown.

“Food sales fell 3.1% month-on-month in July, but remained at elevated levels and volumes were 3.4% higher than they had been in February.

“The annual retail sales deflator fell 0.7% year-on-year in July, with fuel prices down 11.2% year-on-year. This was less than the 1.5% year-on-year drop in June when fuel prices had been down 15.4% year-on-year.

“Excluding fuel prices, the annual retail sales deflator rose 0.5% in July after a gain of just 0.1% in June.”

Outlook

Howard Archer adds: “Consumer spending looks on course for a substantial rebound in the third quarter after contracting a record 23.1% quarter-on-quarter in the second quarter of this year. 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 belief that the economy is likely to see GDP growth of at least 12% quarter-on-quarter in the third quarter, if not significantly higher.

“However, there is considerable uncertainty as to just how willing and able consumers will be to spend beyond the third quarter. Indeed, persistent consumer caution is seen as a significant risk that could limit the UK recovery.”

Howard Archer continues: “The fundamentals for consumers have experienced 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 730,000 over April-July (according to Pay as You Earn Real Time Information data) – while others are worried about redundancy once the furlough scheme ends in October.

“There is clearly a very real likelihood that unemployment will rise significantly once the furlough scheme ends. The EY ITEM Club suspects the unemployment rate could get up around 8.5% around the turn of the year 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. The only recent good news for consumers has been low inflation, which 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 get as low as 0.2% over the next few months. Even so, ONS data shows that real earnings fell 2.2% year-on-year in June and was down 2.0% year-on-year in the three months to June.

“Furthermore, consumers are highly likely to adopt a cautious approach to major discretionary purchases given the uncertain economic environment. Consumer confidence currently remains at a relatively low level despite coming off recent long-term lows. On top of this, ongoing concerns over the possibility of a rise in coronavirus cases could magnify consumer caution, which may limit future shopper footfall in the short term.

“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.”