A 0.9% month-on-month fall in retail sales in March set back some of the gains made in the early part of this year. However, March's weakness was probably partly driven by unseasonably wet weather, and more fundamental drivers of retail performance are looking healthier.
The jobs market remains resilient, household energy bills are set to fall from the summer, and consumer confidence has picked up. That said, still-high inflation and the lagged effect of previous rises in interest rates will hold back the extent of a retail revival.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “After retail sales volumes saw healthy growth in the first two months of 2023, they retreated in March, falling 0.9% month-on-month. Most major retail sub-sectors saw sales decline, with department stores and clothing particularly weak. However, total sales rose 0.6% quarter-on-quarter in Q1. This was the biggest quarterly rise since Q2 2021 and reinforces other evidence that the economy probably grew slightly in the first three months of this year.
“The fact that last month was the wettest March in England for more than 40 years likely exaggerated retail's weakness, although online spending may have mitigated any drop-off in physical shopping. And beyond the so-far more shopping-friendly weather this month, there's good reason to think the most significant challenges have passed for retailers. Job creation has continued at a healthy pace and unemployment remains low. Consumer confidence, on the GfK measure, rose in April to the highest level since February 2022. The likelihood that household energy bills will fall from the summer, on the back of the sizeable fall in wholesale energy prices in recent months, should boost discretionary spending. And although inflation has proved unexpectedly sticky recently, less expensive energy is one of several reasons to think price pressures should ease quickly this year, allowing household real incomes to start growing again in the second half of 2023.
“Still-high inflation in the short-term, combined with the lagged effect of past rises in interest rates, could hold back a retail recovery (while another rate rise from the Bank of England in May is looking more likely). But 2023 should prove a better year for retailers than 2022, when the sector felt the effects of the energy price shock and a post-pandemic shift in spending from goods back to services.”