Chart of the month - September
Bumper UK retail sales in July as consumers shrugged off Brexit gloom
The bumper UK retail sales figures for July and another solid report for August showed that shoppers were undeterred by Brexit uncertainty, contrary to the implications of appalling survey data in the immediate aftermath of the referendum. Core UK retail sales volumes (which exclude auto fuel) were up 1.7% over the two-month period; compared to a year earlier, core volumes were up only fractionally less than 6% and by over 6% including auto fuel. Most categories showed good momentum, although clothing sales were distorted by weather patterns. While the surprising strength in the data was partly attributable to warmer weather and discounting, it still provided comfort with regard to total household demand.
While we acknowledge that UK retail sales are volatile on a monthly basis, the three-month trend has been improving since the start of the year. The marked expansion in retail sales in July was consistent with the British Retail Consortium (BRC) retail sales numbers released a week earlier. BRC retail sales were up 1.9% year-on-year (YoY) in value terms and +3.5% YoY in real terms in July, which was the biggest gain in six months. Also, the high-frequency John Lewis weekly sales report, which is a good proxy for the trend in middle-class spending, has remained resilient and has shown no discernible referendum impact. Furthermore, the UK services Purchasing Manager Index (PMI), an activity indicator of a sector that represents almost 80% of the UK economy, rebounded markedly in August, back to pre-vote levels.
Further good news for the near-term outlook for the UK high street includes the recovery in the UK GfK measure of consumer confidence in August, having plummeted in July. All sub-indices including future and present financial situations, current and future economic conditions and major purchase indices rebounded. Interestingly, the Savings Index fell sharply, suggesting that consumers have shrugged off Brexit uncertainty and prefer to spend, and also, perhaps, that they have been influenced by the August cut in interest rates.
On the basis of this evidence, it is increasingly likely that the UK will avoid entering a recession. Going forward, the road may be bumpier, but a favourable macro backdrop for consumers, including a tight labour market and high levels of job vacancies, should remain supportive to overall activity.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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