Uptick in retail sales likely to be short-lived as Iran conflict drags on confidence
The latest ONS retail sales figures show volumes rose by 0.7% in March, driven by non-store retailing (up 1.4%) and clothing and footwear (up 1.2%).
Jacqui Baker, head of retail at RSM UK said: “The slight improvement in weather helped to lift retail sales in March as consumers refreshed their wardrobes for the spring season and prioritised ‘feel good’ categories such as health, beauty and wellbeing. But this uptick is likely to be short-lived as increased cost pressures stemming from the Middle East conflict continue to filter through to consumers’ pockets.
“The 20% jump in fuel prices alone since the start of the war is enough to hit consumer confidence, which fell again from -21 in March to -25 in April. Unfortunately, there are more headwinds to come, as the cumulative effect of a rise in energy costs and inflation, plus increased nervousness, causes consumers to pull back on spending.
“However, consumers are still sitting on high levels of savings, with over a fifth planning to save less in the coming months to cover rising costs, which should help to soften the blow in the short-term.
“The gloomy outlook for retail sales combined with increased staff and business rates costs, means there are tougher times ahead for retailers. With some retailers resorting to job cuts to mitigate increased costs, it’s clear the government needs to take action to support this vital industry before it’s too late.”
Thomas Pugh, chief economist at RSM UK, added: “The headline increase of 0.7% in retail sales volumes suggests consumers weren’t too phased at the start of the Iran war. However, a good portion of this was due to a whopping 6.1% m/m rise in fuel sales, the largest since April 2021, which is a clear sign that consumers tried to bring forward fuel purchases ahead of price increases. Excluding fuel, retail sales volumes increased by a much more subdued 0.2%.
“Looking ahead, the slump in consumer confidence in April suggests that the war will have a bigger effect on this month’s sales. What’s more, there will be a bigger hit to real disposable incomes in April as the full effect of the recent fuel price rises is felt, which will be intensified when the utility price cap resets higher in July. In addition, the jump in interest rate expectations will gradually depress disposable incomes as households reset mortgage deals. The average household remortgaging now could be £150 a month worse off than in February. Given real household disposable income was set to grow by less than 1% this year anyway, a sharp increase in inflation would see real incomes stagnate or even shrink once again.
“Admittedly, the household saving rate was elevated going into the crisis, meaning that consumers can save a bit less to cushion the blow to their lifestyles, so the full impact on income is unlikely to flow through into spending. Indeed, this is what happened in 2022 when the saving rate dropped sharply. But the longer the crisis goes on for, the more likely consumers are to adjust their spending habits, as consumer confidence wanes. That sets a much tougher outlook for retailers than we were considering before the war.”