- One of the wettest Julys on record looks to have contributed to a sizeable fall in retail sales, ending a run of successive month-on-month increases. Weather aside, the EY ITEM Club thinks economic fundamentals point to retail sales growing over the rest of this year, but at a sluggish pace.
- Falling inflation means average real pay has finally started to rise again. And household balance sheets are in good shape. But the impact of higher interest rates on borrowers is growing and, perhaps relatedly, the previous buttress provided by a strong jobs market is looking less solid.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “After retail sales volumes rose a strong 0.6% month-on-month in June, aided by unusually warm weather, one of the wettest Julys on record looks to have contributed to a significant 1.2% fall in sales that month. Feedback received by the Office for National Statistics (ONS) suggests that food store sales, which declined by 2.6%, were particularly affected. The bad weather was also cited as a reason behind a decline in non-food sales, although non-store and fuel sales increased on the previous month.
“July's weak retail performance pushed underlying three-month-on-three-month growth down to 0.1% from 0.4% in June. And with sales in July well below the Q2 average, there appears to be a good chance that sales volumes could fall in the current quarter. But while the EY ITEM Club doesn’t think July’s particular weakness is wholly indicative of the outlook for retail, given the weather factor, subdued growth is likely to characterise the sector for the foreseeable future.
“On the one hand, falling inflation and still-strong growth in cash pay mean average wages have finally started to rise again in real terms. Regarding price pressures, the latest retail release showed the annual rise in shop prices slowing to 4.3% in July, a 22-month low. Meanwhile, the financial position of households, in aggregate, is relatively healthy, reflecting unplanned savings accumulated during the pandemic and a paying down of unsecured debt in recent years.
“But the impact of higher interest rates continues to build. An increasing number of households are reaching the end of fixed-rate deals and those re-mortgaging typically face a rise in monthly mortgage payments of several hundred pounds. And evidence of a cooling in the jobs market from rising unemployment and falling job vacancies mean that what has been a buttress to consumer spending is now looking less solid.”