- Consumer confidence continues to improve as inflation returns to 2%
Retailers cashed in on the warmest May in at least 140 years last month as shoppers splashed out on clothing, footwear and furniture.
Retail sales volumes bounced back from a wet weather-driven 1.8 per cent decline in April to soar 2.9 per cent in May, smashing forecasts of a 1.5 per cent jump, data from the Office for National Statistics shows.
The rise was driven by 5.9 per cent growth in online sales, reflecting the largest monthly increase since April 2022, while clothing and household goods sales added 5.4 and 3.5 per cent, respectively.
Warm weather, promotions and easing inflation all contributed to solid sales growth
While warm weather played its part, clothing and footwear retailers, furniture stores, and sports equipment, games and toys stores also cited the impact of promotions as a source of strength.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: ‘This suggests consumers are behaving in a cautiously optimistic manner, which is good news for businesses.
‘The real test will come once promotional activity tapers off, which it must for many, for the sake of margins, and how willing customers are to continue spending once that sticking plaster’s been ripped off.’
Retail sales volumes growth was broad based
Separate data this week suggests the UK consumer is finding its feet as the broader economic picture improves, with headline inflation finally back to its 2 per cent target.
The GfK consumer confidence index jumped to a reading of -14 in June, hitting its highest level since November 2021 and marking the third consecutive month of improvement.
Silvia Rindone, EY’s UK and Ireland retail lead, said: ‘Although macroeconomic indicators, including interest rates, inflation, and wages are improving, it seems consumers are biding their time, waiting for a more optimistic climate before loosening their purse strings.
‘As we move into the latter half of 2024, there is a sense that the tide may turn. A summer packed with high-profile sporting events such as UEFA Euro 2024 and the Paris Olympics, coupled with better weather and the possibility of political changes, could well be the catalyst for a resurgence in consumer confidence.’
Retail sales volumes remain below their pre-Covid-19 levels
Thomas Pugh, economist at RSM UK, forecasts retail sales volumes to ‘continue to gradually improve from here’ as the impact of easing inflation feeds through.
He said: ‘Households’ real disposable incomes are set to rise rapidly with inflation back to 2 per cent, tax cuts kicking in and as the large minimum wage rise is felt in people’s pockets. This will boost overall consumer spending and retail sales volumes.
‘Second, inflation is especially weak within retail sales. Indeed, the price of retail goods increased by just 1.2 per cent in May annually, the slowest rise since early 2021. This means that continued strong nominal spending will increasingly show up in sales volumes.
‘Third, retail sales volumes are still about 2 per cent below their pre-pandemic level.
‘This is partly a hangover after a huge splurge in spending on goods during the pandemic. But after two years of reduced spending on retail goods, households will need to start replacing some of those things bought during the pandemic.
‘What’s more, as the housing market starts to recover and transaction increase, this will boost demand for household goods.’