- Retail sales volumes saw a further healthy performance in August pointing to the consumer continuing to play a leading role in the economy’s Q3 bounce back. Pent-up demand is still a factor following the full opening up of the retail sector in June
- 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
- 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
- The opening up of the consumer services sector in July may possibly have diverted some consumer spending away from retail. Spending on eating out was also clearly lifted in August by people using the ‘Eat Out to Help Out’ Scheme
- Consumer spending looks on course for a substantial rebound in 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 around 15%
- 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 EY ITEM Club predicts that consumer spending will be constrained after Q3 by cautious consumers and markedly higher unemployment. Additionally, potential rises in COVID-19 cases over the coming months 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:
“Healthy August retail sales pointed to consumers continuing to play a leading role in the economy’s third quarter bounce back. Retail sales volumes increased a decent 0.8% month-on-month in August when they were up 2.8% year-on-year. Furthermore, retail sales volumes in August were 4.0% above their February level, before they were affected in March and, especially, April 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.
“In fact, August marked a fourth successive month of retail sales growth from the sector’s lows in April so the early growth rates as the sector re-opened were never going to be sustained. There were month-on-month gains of 3.6% in July, 14.0% in June and 12.3% in May following the record 18.1% month-on-month fall in April in the aftermath of the lockdown restrictions imposed on 23 March. This notably included the closure of the entire retail sales sector except for essential retailers. The retail sector started to open up from the lockdown in mid-May when garden centres and homeware shops were allowed to open in England from the middle of the month, while non-essential retailers were allowed to re-open from mid-June.
“The underlying strength of the recent recovery in retail sales was evident in volumes being up 16.7% in the three months to August compared to the three months to July.
“The ONS reported that “sectors above February’s pre-pandemic level were food stores, other non-food retailing, household goods and non-store retailing. All other sectors have shown a slower rate of growth since lockdown and continued to recover.”
“Spending for home improvements continued to rise in August as sales volumes within household goods stores increased by 9.9% when compared with February.
“Retail sales excluding fuel were up 0.6% month-on-month in August and up 4.3% year-on-year.
“Online sales fell 2.5% month-on-month in August as people returned to the shops but were still 46.8% 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 the impact of COVID-19 was felt, 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 28.1% in August from 28.9% in July, 31.8% in June and a record high of 33.3% in May. Nevertheless, this is still well above a share of 20.0% in February.
“The annual retail sales deflator fell 1.2% year-on-year in August, with fuel prices down 10.7% year-on-year. Excluding fuel prices, the annual retail sales deflator was unchanged year-on-year in August.”
Howard Archer adds: “Consumer spending is clearly 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 in June has released 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 got a significant lift in August from the Chancellor’s ‘Eat Out to Help Out’ scheme.
“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 taken a clear 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 once the furlough scheme ends in October.
“There is also a 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 early 2021 compared to the latest rate of 4.1% in the three months to July.
“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, spikes in COVID-19 cases over the coming months 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.”