Review of the economic trends impacting the retail sector

UK GDP rose by 0.3 per cent in the first quarter of 2015, compared with the previous quarter, completing nine consecutive periods of positive growth. Underlying momentum remains strong with the UK economy 2.4 per cent larger than this time last year and recent surveys suggesting these figures could well be revised upwards next month.

Chart 1: GDP growth expected to pick up in Q2 2015
Chart 1
Source: ONS

There was a significant drag from net trade where a negative contribution of 0.9 ppts was much weaker than expectations. But the domestic economy remains robust and the 1.5 per cent rise in investment was especially strong given pre-election uncertainty. Consumer spending did disappoint a little with a modest 0.5 per cent rise. Nevertheless, we remain confident that spending will pick up in the coming months provided the Chancellor’s emergency budget does not spring any major surprises.


Inflation, or rather “deflation”, is the word of the moment and April’s figure of -0.1 per cent is the first time since 1960 that the UK economy has seen a fall in the general level of prices. Fears of deflation becoming entrenched appear to have eased in recent months as consumer spending remains robust and nominal wages are rising fast – up 2.7 per cent in March. Food deflation (2.8 per cent in April) and Transport costs (down 2.8 per cent) are the main components pushing down prices. Pressures in the supply chain remain modest. The Producer Price Index, indicative of cost pressures facing retailers, has been deflationary since July 2014 with the latest data suggesting prices fell 1.7 per cent in April. This all bodes well for low levels of inflation for the coming months providing there are no unexpected shocks in the supply chain – especially oil.

The Bank of England’s latest report suggests that the inflation target of 2 per cent will not be hit until 2017. Markets are not pricing in a rise in interest rates until the middle to 2016.

Chart 2 – Pressure on supply chains remain muted
Chart 2
Source: ONS

Labour market

The outlook for the labour market and wages will be critical in swaying thinking on monetary policy. On that front, the latest data showed annual growth of average weekly earnings accelerating from 2.4 per cent in February to 2.7 per cent in March. Real wage growth is likely to gather pace in the coming months as inflation/deflation remains low and nominal wage growth accelerates as the labour market tightens. The unemployment rate fell further to 5.5 per cent in February from 5.6 per cent in January while the claimant count fell to 763,000 in April, the lowest in over 10 years.

Chart 3 – Real wages are rising fast
Chart 3
Source: ONS

Retail and Consumer Spending

Retail Economics estimates that retail spending rose by 1.0 per cent in April, year-on-year, as seasonal distortion, caused by the timing of Easter, made comparisons difficult to read. Nevertheless, given pre-election cautiousness, we believe that underlying momentum remains strong. However, the performance of the retail sector remains polarised with the food sector under pressure.

We estimate that food sales declined by 4.9 per cent in April, mainly due to the timing of Easter, but the three month rolling average, which strips out seasonal distortions, still showed a decline in value growth of 0.6 per cent. In terms of value, the grocery sector has been shrinking for almost 12 months.

Chart 4 – Food sector facing significant structural change
Chart 4
Source: Retail Economics Index

Non-food performed strongly with Fashion and Home related sectors showing robust growth. The timing of warmer weather, the hottest April on record, was a reason for many consumers to renew their summer wardrobes and hit the high streets.

Chart 5 – Fashion performs well on back of seasonal weather
Chart 5
Source: Retail Economics Index

Despite tough annual comparisons, Furniture and Flooring also produced stellar growth supported by strong consumer confidence and the appetite and supply of credit growing faster. Credit card lending was up 5.7 per cent year-on-year in March and net unsecured borrowing rose by 6.9 per cent (chart 6). The supply and flow of credit is especially important for the purchase of big-ticket items such as furniture, fitted kitchens and bathrooms.

Chart 6 – Growth in credit supporting big-ticket items
Chart 6
Source: Bank of England

In addition, the housing market, which slowed in the final months of 2014, is showing signs that it is about to pick up. This will support the sales of housing related items further in the coming months and could also boost consumer confidence.

Seven reasons to be positive on the outlook of the retail sector

We expect the retail sector to perform strongly in the coming months.

1. Deflation and strong employment growth will give a significant boost to real income growth

2. The labour market is performing robustly and the rate of employment is at an all-time high

3. Conservatives have won a majority removing any prolonged risk of political uncertainty

4. Conservatives have pledged to pass a law to guarantee that VAT, income tax and national insurance will not rise before 2020 giving households additional certainty

5. Interest rates are not expected to rise until mid-2016 and when they do it is likely they will be slow and protracted

6. Appetite and supply of consumer credit is growing. Expected to accelerate with better job security and continued cheap credit

7. Consumer confidence remains at historically high levels, similar to those experienced during pre-crisis financial crisis years

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