Press release

21 Jul 2023 London, GB

A strong June for retailers, but rising rates present a challenge – EY ITEM Club comments

June delivered another month-on-month rise in UK retail sales, and a strong one at that. This increases the likelihood that the economy grew in Q2. But the EY ITEM Club thinks retail will find it tricky to maintain its recent robust performance.

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James White
James White

Senior Executive, Media Relations, Ernst & Young LLP

Communications professional experienced in public relations, journalism and media relations. Aston Villa supporter. Passionate about sports and automotive. Former sports journalist.

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  • June delivered another month-on-month rise in UK retail sales, and a strong one at that. This increases the likelihood that the economy grew in Q2. But the EY ITEM Club thinks retail will find it tricky to maintain its recent robust performance.
  • A rising number of households are feeling the impact of a significant rise in mortgage rates, a development which looks to be weighing on consumer confidence. Inflation is still high, although another slowdown in shop price rises in June offered a further sign that pressure from this source is lessening.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Retail sales volumes increased in June for the second month in a row, rising by a well-above-consensus 0.7% month-on-month following May's (downwardly revised) increase of 0.1%. This left growth in Q2 at 0.4% quarter-on-quarter, up from 0.2% in Q1 and the strongest quarterly gain in two years.

“Feedback received by the Office for National Statistics (ONS) suggested June's unusually warm weather (marking the hottest June on record) boosted spending in some areas. Food was one, where sales rose 0.7% month-on-month. Non-food store sales increased 1%, helped by summer discounts, while fuel was the only main retail sub-sector where sales fell.

“Retailers' better performance in Q2 increases the likelihood that the economy managed to grow in the quarter, despite headwinds from May's extra bank holiday and ongoing industrial action. But the sector will likely face significant challenges with holding onto its recent strength. So far, the impact of rising interest rates has been modest, reflecting the high share of fixed-rate mortgages and a pick-up in interest income for savers. But a rising number of households are reaching the end of fixed-rate deals and those re-mortgaging in the second half of this year typically face a rise in monthly mortgage payments of several hundred pounds.

“Meanwhile, households’ spending power remains under pressure from still-high inflation. And these headwinds appear to be finally affecting consumer confidence – the GfK measure slid in June, the first fall since January. That said, pressure from inflation is becoming less significant, as June's fall in Consumer Price Index (CPI) inflation demonstrated. And the fact that annual growth in June's retail price deflator slowed to a 20-month low of 5.3% offered another disinflationary sign. So, a difficult outlook for retailers, but with some sources of hope.”