Clothing sales rejuvenate UK retail sector in June, economists take pinch of salt

UK retail sales were rejuvenated by warm weather last month, according to the Office for National Statistics, though economists disagreed over whether this was a sign of a revitalised economy or a false dawn.

Retail sales volumes rose 0.9% in June, bouncing back from the 1.5% fall the prior month (revised down from its initial 1.1% estimate) and beating the consensus estimate of 0.5%.

Sales surged 3.0% compared June last year when the Brexit referendum dampened the mood, up from a 0.6% year-on-year rise in May and better than the 2.5% forecast by economists.

Food sales volumes fell by 0.5% month-to-month, while clothing sales increased 0.4% - which some economists said was disappointing for what was one of the warmest months on record.

Instead, the pickup in sales was driven by a 3.3% rebound in household goods sales, following a huge 5.8% fall in May, and a 2.8% jump in non-store sales, following a 1% decline in May.

The rebound in June's month-on-month sales volumes means sales in the second quarter is estimated to have risen 1.5%, with increases seen across all store types after a 1.4% fall in the first quarter.

Senior ONS statistician Kate Davies said: “A particularly warm June seems to have prompted strong sales in clothing, which has compensated for a decline in food and fuel sales for the month.

“Looking at the quarterly data, the underlying trend as suggested by the three-month on three-month movement is one of growth, following a fall in quarter 1, suggesting a relatively flat first half of 2017.”

Inflation moderated, however, with average store prices, including petrol stations, increasing 2.7% year-on-year following a rise of 3.2% in May, as a result of slowing fuel prices.

Online sales increased 15.9% on the year and by 1.8% on the month, accounting for approximately 16.2% of all retail spending.

ECONOMIC ANALYSIS

For Paul Hollingsworth of Capital Economics the figures "suggest that recent talk of a marked consumer slowdown has been overdone", though he acknowledged that retail sales figures are very volatile on a month-by-month basis and the heatwave was a boost that may not be sustained.

Noting that retail sales will boost GDP growth by just shy of 0.1 percentage points, he said: "What’s more, to the extent that retail sales provide a signal about the pace of overall household spending growth, this is another reason to think that next week’s GDP figures should show a re-acceleration in GDP growth in Q2."

While admitting that "we shouldn’t get too carried away by these figures", he said the fact that growth in sales values also accelerated in June "suggests that households are not tightening their belts in response to higher inflation or Brexit uncertainty" and provides "welcome support for our view that the economy should maintain a decent amount of momentum over the coming quarters".

Economist Chris Williamson from IHS Markit was less sanguine, saying that with spending likely to have been buoyed by sunny weather, this suggested "some pay-back in seasonal spending may be seen later in the summer", while the latest Visa card data, which tracks spending across a wider range of activities than just retail, showed consumers pulling back on their expenditure for a second successive month in June, rounding off the worst quarter for almost four years.

He said the improvement "needs to be treated with some caution" and pointed to recent surveys showing the economy was losing momentum at the end of the second quarter, largely linked to weaker growth of consumer spending, while business optimism about the year ahead has fallen to its lowest since late-2011.

“With the economy showing signs of losing momentum and inflation showing a surprise fall to 2.6%, the latest data suggest that August could well see the Bank of England revise down its forecasts for the economy and put to bed the prospect of a rate hike any time soon, albeit with the door left open for a tightening of policy if the economic data surprise to the upside as we move through the second half of the year.”

Sam Tombs at Pantheon Macroeconomics felt the increase in retail sales was "relatively modest", given the temporary support to demand from what was was the fifth warmest June since 1910, which normally would be expected to see food and clothing sales surge.

With car sales plunging in the second quarter and business volumes at consumer services firms too, according to the CBI’s growth indicator survey, Tombss doubted that GDP growth improved on Q1’s 0.2% quarter-on-quarter rate in Q2.

"Meanwhile, the outlook of falling real wages and tightening credit conditions suggest that retail sales will struggle to retain Q2’s vigour in the second half of this year."