- The September CBI distributive trades survey points to healthy retail sales, indicating that the strong Q3 bounce in consumer spending has persisted through to the end of the quarter
- The CBI’s sales balance rose to a 17-month high of +11% in September from -6% in August. This followed on from ONS data showing that retail sales volumes rose for a fourth month running in August and were up 16.7% on a three-month/three-month basis
- Consumer spending rebounded strongly over Q3, after contracting a record 23.1% quarter-on-quarter in Q2. This supports the EY ITEM Club’s belief that GDP growth in Q3 is now likely to be at least 15% quarter-on-quarter. The full opening up of the retail sector in June released pent-up demand, while the opening up of the hospitality sector and other consumer services from early July further fuelled consumer spending
- Despite a strong rebound in consumer spending in Q3, there is considerable uncertainty as to just how willing and able consumers will be to spend going forward. The CBI survey indicates that a balance of 0% of retailers expect sales volumes to be higher year-on-year in October
- It is possible that the lift to consumer spending from the release of pent-up demand may have nearly run its course
- The EY ITEM Club suspects that consumer spending will be constrained after Q3 by cautious consumers and the possibility of markedly higher unemployment
- Meanwhile, the recent rise in COVID-19 cases and introduction of restrictive measures 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 points to robust retail sales over the first half of September (the survey was carried out 27 August – 15 September) after data from the ONS showed that they had seen ongoing healthy growth in August.
“The CBI reported that sales in September were slightly above average for the time of year for the first time since November.
“However, sales volumes were still considered to be 8% lower in September than they would have been in ‘normal’ conditions without a pandemic. This masked appreciable variations across sectors, with the CBI reporting that sales of household furniture were 39% higher than normal, DIY & hardware sales were up 20% and groceries were up 10%, while sales of clothing were down 40% and department store sales were down 23%.
“The CBI reported that internet sales slowed in September and were below average. This contrasted with their much improved performance earlier in the year when lockdown restrictions were fully in place or only partially eased for the retail sector.
“Despite healthy retail sales in September, retailers were relatively cautious about near-term prospects. A balance of 0% expected retail sales volumes to be up year-on-year in October.”
Retail sales saw ongoing healthy growth in August
Howard Archer continues: “Latest ONS data show that retail sales volumes rose 0.8% month-on-month in August, the fourth successive monthly gain; they were up 2.8% year-on-year and 4.0% above February’s level before they were affected by the lockdown.
“While the rate of growth in retail sales slowed in August, it is likely that some consumer spending has recently been diverted away from retail towards services following the opening up of the hospitality sector and other consumer service sectors during July. In addition, the temporary cutting of VAT for the hospitality sector and the ‘Eat Out to Help Out’ scheme in August provided further incentives to spend on non-retail.”
Howard Archer adds: “Consumer spending saw a substantial rebound in Q3 after contracting a record 23.1% quarter-on-quarter in Q2. The full opening up of the retail sector in June released pent-up demand, while the opening up of the hospitality sector and other consumer services from early July further fuelled consumer spending. Spending on meals also got a significant lift in August from the Chancellor’s ‘Eat Out to Help Out’ scheme.
“However, it is possible that the lift to consumer spending from the release of pent-up demand may have nearly run its course.
“There is considerable uncertainty as to just how willing and able consumers will be to spend beyond Q3. Indeed, persistent consumer caution is seen as a significant risk that could limit the UK recovery.
“The fundamentals for consumers have taken a downturn as a result of COVID-19, 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 695,000 over April-August (according to Pay as You Earn Real Time Information data) – while others will be concerned that they may still end up losing their job depending on what happens to government support schemes from the end of October. There is a possibility that unemployment will rise markedly. It remains to be seen how effective the new measures outlined by the Chancellor to support jobs will be.
“Additionally, many incomes have been affected. The latest ONS data shows total average earnings fell 1.0% year-on-year in the three months to July. However, in good news for consumers, inflation is low, and dipped to 0.2% in August (the lowest since January 2016). Even so, ONS data shows that real earnings were down 1.8% year-on-year in the three months to July.
“Consumers may 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.
“Additionally, the recent rise in COVID-19 cases and introduction of restrictive measures 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.”