- Consumer confidence continues to improve as inflation returns to 2%
Retailers took advantage of the warmest May in at least 140 years last month as shoppers spent money on clothes, shoes and furniture.
Retail sales volumes recovered from a 1.8 percent drop caused by wet weather in April to soar 2.9 percent in May, smashing forecasts for a 1.5 percent jump, data show from the Office for National Statistics.
The increase was driven by 5.9 percent growth in online sales, reflecting the largest monthly increase since April 2022, while sales of clothing and home goods rose 5.4 and 3 .5 percent, respectively.
Warm weather, promotions and reduced inflation contributed to strong sales growth.
While warm weather played a role, clothing and footwear retailers, furniture stores, and sporting equipment, game and toy stores also cited the impact of promotions as a source of strength.
Sophie Lund-Yates, senior equity analyst at Hargreaves Lansdown, said: “This suggests consumers are behaving in a cautiously optimistic way, which is good news for businesses.”
“The real test will come once promotional activity slows down, which for many it must, for the sake of margins and how willing customers are to continue spending once the sticky plaster has been removed.”
Retail sales volume growth was broad
Separate data this week suggests the UK consumer is finding its feet as the broader economic outlook improves, with headline inflation finally returning to its 2 per cent target.
The GfK consumer confidence index jumped to a reading of -14 in June, reaching its highest level since November 2021 and marking the third consecutive month of improvement.
Silvia Rindone, EY UK and Ireland retail leader, said: “Although macroeconomic indicators, including interest rates, inflation and wages, are improving, it appears that consumers are biding their time, waiting for a climate more optimistic before loosening their pockets.
‘As we move into the second half of 2024, there is a feeling that the tide may turn. A summer full of high-profile sporting events such as Euro 2024 and the Paris Olympics, along 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, predicts retail sales volumes will “continue to gradually improve from now on” as the impact of easing inflation takes hold.
He said: Real disposable income of ‘households’ will rise rapidly with inflation returning to 2 per cent, tax cuts coming into force and the big increase in the minimum wage being felt in people’s pockets. This will boost overall consumer spending and retail sales volumes.
‘Second, inflation is especially weak in retail sales. In fact, the price of retail goods increased by just 1.2 percent year-on-year in May, the slowest increase since the beginning of 2021. This means that continued strong nominal spending will increasingly be reflected in sales volumes.
‘Third, retail sales volumes are still about 2 percent below their pre-pandemic level.
‘This is partly a hangover after a huge splurge on goods spending during the pandemic. But after two years of reduced spending on retail goods, households will need to start replacing some of the things purchased during the pandemic.
“What’s more, as the real estate market begins to recover and transactions increase, this will drive demand for home goods.”
