Blow to retail as sales drop 2.7%

The latest ONS retail sales figures show volumes dropped by 2.7% in May, driven by food (down 5.0%), household goods (down 2.5%) and clothing (down 1.8%).

Jacqui Baker, head of retail at RSM UK and chair of ICAEW’s Retail Group, comments: “Retail sales saw their biggest drop since December 2023. Despite the improvement in consumer confidence in May, this didn’t manage to translate into spending as nervousness remains and consumers hit pause on retail spend and squirreled away their money instead.

“Clothing and footwear inflation rose 0.8% month-on-month in May as Easter sales came to an end. However, unfortunately for some retailers, they have been left with little choice but to bring forward the next sales cycle as they struggle to shift stock.

“Online took a hit in May, which could be partly due to the cyber incidents that have recently unfolded in the retail sector. Despite this shift in behaviour, it didn’t translate into a much-needed boost to high street footfall.

“With consumer confidence on the up, the holiday and festival season fast approaching, and scorching weather in June, the signs are there that we should see another uptick in retail sales soon. The concern will be that if inflation persists in areas that directly impact household budgets, this could delay any meaningful recovery in consumer confidence and in turn, sales in the coming months.”

Thomas Pugh, chief economist at RSM UK, added: “After shrugging off the initial bout of tax and tariff turmoil in April, the sharp drop in retail sales volumes in May suggests that consumers became much more reluctant to spend last month. That represents a downside risk to our forecast of 0.2% q/q growth in Q2. Admittedly, much of the weakness was in food sales, which looks like a payback from a surge in April. But sales volumes dropped across the board suggesting genuine weakness.

“Looking ahead, the outlook for consumer spending growth is less rosy than it has been in the first half of the year. Inflation is now back at 3.4% and will rise further over the summer, mainly driven by tax rises, higher utility bills and now more expensive petrol. That will eat into consumers’ disposable income. At the same time, the labour market is clearly cooling. This will weigh on wage growth and employment over the rest of the year.

“However, the outlook is far from dismal. Despite rising inflation and slower wage growth, real incomes will still rise at a reasonable pace this year. Household balance sheets are considerably stronger than they have been previously, and lower interest rates will continue to help. What’s more, there are good signs that the worst of the labour market pain and tariff uncertainty is already behind us.

“The determinant of spending growth in the second half of the year is likely to be whether consumer confidence continues to rebound and households ease back on their extraordinarily high saving rates. There is some good news, with consumer confidence rising to its highest level since December in June.”