24 june 2022
Commenting on the May ONS retail sales data, which showed a decrease in retail sales volumes of 0.5%, Jacqui Baker, partner and head of retail at leading audit, tax and consulting firm RSM UK, said:
May was the first month that households felt a pinch in their bills. Consumer confidence fell to -41% in May, a record low, which won’t come as good news for retailers who are relying on people to spend. It’s no secret that consumers are feeling the pressure with higher energy bills in full flow and the cost-of-living crisis chipping away at household budgets. For many, spending will become increasingly dominated by the essentials, as opposed to luxuries.
Despite this, in preparation for the summer holidays and events such as the Jubilee weekend, consumers took the opportunity to buy new outfits with clothing sales up 2.2% in May. It’s likely this will continue to be a key trend during the summer months, with more people switching away from purchasing household goods (down 2.3%), to spending on holidays and social events instead. The fall in household goods was compounded by an increase in the price of goods, up 50% more than other retail sales categories.
Food sales continue to rebalance, and the hotter weather has also meant more people are making the most of socialising through dining out, with many restaurants seeing strong bookings in May. As a result, food sales fell 1.6% last month.’
Thomas Pugh, economist at RSM UK, added: ‘The drop in retail sales in May is another indication, along with the slump in the S&P/CIPS composite PMI and collapse in consumer confidence, that the economic contraction which occurred in March and April, continued in May. Indeed, we expect the economy to contract by 0.5% q/q in Q2.
The surge in inflation and subsequent slumps in households’ real incomes and consumer confidence doesn’t bode well for retail sales over the next year. However, the silver lining is that total spending is still rising, the value of retail sales rose by 5% y/y in May. This suggests that consumers are still willing to go out and spend, but they just aren’t getting as much for their money. Sales volumes were down by 4.7% y/y in May.
This suggests retail sales will slow rather than collapse. Indeed, there are three key reasons why sales might hold up. First, households have a pot of savings worth almost 15% of GDP to draw down to help combat inflation. Second, the extremely tight labour market makes it unlikely that the unemployment rate will jump sharply. Third, additional government support will start to support lower income households in the second half of the year.’