Retail sales: Happy Days?
This week’s Retail Note focuses on the official retail sales figures for June from the ONS, which once again defied macro-economic gravity.
6 minutes to read
Key Messages
- Retail sales improve on both a m-o-m and y-o-y basis
- Three consecutive months of improving growth
- Retail sales values +1.2% m-o-m in June, volumes +0.8%
- Despite inflation, consumers bought and spent more
- Retail sales values surge +7.8% y-o-y
- Y-o-y volume decline of -0.9% lowest since early 2022
- Grocery returns to positive volume growth, non-food not far off
- Cosmetics, footwear, specialist foodstores top performing categories
- Textiles, second-hand shops, sports/toys worst performing categories
- Implied inflation in grocery (12.9%) much higher than in non-food (5.9%)
- Slow month for online (-0.5% m-o-m, +7.1% y-o-y)
- Q2 retail sales (values +2.8%, volumes +0.8%) considerably higher than Q2 GDP.
More of the same. Correction – more of the same, but better.
Retail sales remain buoyant, whether you look at the monthly, quarterly or year-on-year figures. A return to volume growth in food, non-food not a million miles away. Inflation receding, albeit very gradually. In a parallel universe, detached from the wider macro-economic world, we would probably be talking of a retail boom.
The ‘headline’ numbers
The limitations of month-on-month comparisons notwithstanding, we have now had three consecutive months of value and volume growth. And an improving trend to boot. For what they are worth, retail sales values (exc fuel) grew +1.2% m-o-m in June, while volumes (exc fuel) were up +0.8%.
Needless to say, this performance way exceeded economists’ expectations. Having had their fingers burnt for months, they had at least penciled in positive growth in June. But the consensus forecast of +0.1% was woefully short of the final outturn (+1.2% exc fuel, +0.7% inc fuel).
Once again, there was no discernible evidence of the latest interest rate hike in any way impacting on consumers’ ability and propensity to spend. Consumers remain far more susceptible to mundane things such as the weather than the intricacies of the macro-economy. And the largely favourable weather in June undoubtedly played a part in the strong figures (as, more artificially, did the inclusion of the late May bank holiday in the figures.)
The y-o-y and Q2 numbers
The more meaningful year-on-year figures were even more positive. Retail sales values (exc fuel) soared +7.8% y-o-y, an acceleration on the +7.5% reported in May. A soft comp (June 2023 +0.8%) takes some of the gloss of this headline number, but it is still the best monthly performance since records began, if heavily distorted post-COVID bounce-backs are disregarded.
The elephant in the room is, of course, inflation and the naysayers are still carping on about the lack of “real” growth. Stripping out inflation, retail sales volumes (exc fuel) were down -0.9% y-o-y in June. But this was the best performance since early 2022. More significantly, food returned to positive volume growth in June (echoing statements from retailers such as Sainsbury’s and Ocado).
Given current directions of travel, it is conceivable that overall retail sales volumes will return to positive growth territory within a few months (October?) With this comes the prospect of inflation receding at a faster rate than we have seen to date. Retail sales a more influential pivot in inflation movements than interest rates?
With the June numbers obviously come the full Q2 outturn figures. Q-o-Q (i.e. Q2 vs Q1) retail sales values (exc fuel) were up +2.8%, while volumes were up +0.6%. In layman’s terms, we bought +0.6% more stuff and spent +2.8% more for the privilege. The more meaningful y-o-y figures (i.e. Q2 2023 vs Q2 2022) showed that retail sales values (exc fuel) grew +7.8%, the third best quarterly performance on record. Y-o-y volumes were down -1.9%, but even this was markedly better than the previous four quarters, where the average decline was -5.8%.
Compare this with the performance of the wider UK economy. We obviously haven’t had the June / Q2 outturn GDP figures as yet, but +0.2% in April and -0.1% in May point to anemic growth at the very best. Comparable retail sales growth of +2.8% (or +0.6% in “real” terms) once again points to the retail sector decoupling and outperforming the wider economy in times of crisis.
Performance by sub-sector
Very little change in the pecking order of performance between retail sub-sectors. Foodstores saw values grow by +10.3%, with specialist operators seeing sales surge +31.1%. The fact that more expensive specialist foodstore operators were the best-performing sub-sector of all and second-hand goods (e.g. charity shops) the second worst (-22.9%) flies firmly in the face of the cost-of-living crisis narrative.
Non-food retail sales values grew by +5.6% in June, with volumes down just -0.3% and implied inflation of 5.9%. Within this, a number of sub-sectors continue to enjoy both value and volume growth, including cosmetics (+30.9%, +20.9%), footwear (+28.7%, +22.4%), books/stationers (+9.8%, +3.1%) and, more surprisingly, furniture (+8.1%, +2.9%). Clothing sales remain buoyant, with sales values increasing (+7.2%), but volumes dipping very slightly (-0.3%).
At the opposite end of the performance spectrum, a number of other non-food sectors saw both value and volume declines. These included textiles (-23.3%, -26.8%), sports/toys (-11.4%, -15.4%), chemists (-7.6%, -16.6%), electricals (-6.3%, -9.7%) and jewellery (-2.0%, -5.9%).
Online slips back
Sharp contrasts in m-o-m and y-o-y performance in online, the former far worse than the latter. Overall online sales declined m-o-m by -0.5%, with online grocery (-1.8%) seeing a steeper reverse than non-food (-0.8%). Within the latter figure, there was a marked divergence between clothing (-5.9%) and household goods (+5.7%).
Y-o-y online sales grew +7.1% against sharp rebasing a year ago. Note that this figure is still below that for all retail sales (+7.8%), yet the ONS’ online penetration figure remains curiously steadfast at 26.0%. Basic mathematics suggest that online continues to lose share.
Where now?
Not too much coverage of these retail sales figures in the media today. But that will soon change when retail sales have a bad month. This will inevitably happen at some point, all the more so given the misplaced obsession with monthly trends. The important thing is to distinguish between a blip and a sustained downturn. The former an inevitability, the latter anything but a foregone conclusion.
Should we be surprised that retail sales continue to outperform the wider economy? Not if we look to history, as this has proved the case in all recent recessions / economic crises. In the midst of the early 1990s recession, in 1991 retail sales grew +3.7% while GDP contracted -1.1%. During the GFC, in 2009 retail sales grew +1.8%, GDP shrunk by -4.5%. During COVID, in 2020 the UK economy contracted by -11.0%, yet retail sales (somehow) managed to squeeze out growth of 0.7%.
Our prediction at the beginning of the year that retail sales values would comfortably outperform GDP growth in 2023 is firmly on course to become a reality. Likewise, that we would see a return to volume growth before the end of the year. That may even happen sooner than we first thought. Bring it on.