U.K. Retail Sales Fall in Signal Recovery Losing Momentum

(Bloomberg) -- U.K. retail sales fell unexpectedly at the sharpest pace since the economy was in lockdown in January, signal that a sharp recovery may be loosing momentum. 

The volume of goods sold in shops and online dropped 2.5% last month after a 0.2% gain in June, which was revised down from a previous estimate, the Office for National Statistics said Friday. Economists had expected a slight slowdown to 0.2%

The figures along with a weaker inflation reading earlier this week ease pressure on the Bank of England to pare back its stimulus program. The central bank has warned that consumer price increases may surge to double its 2% target by the end of this year, but a slower pace of spending reduces that risk.

“With the U.K.’s recovery lagging behind that of other major economies, the return of holidays, social events including weddings and the general easing of restrictions last month hasn’t turbocharged consumer spending in the way many hoped it might have,” said Aled Patchett, head of retail and consumer goods at Lloyds Banking Group Plc.

The pound fell 0.2% to a one-month low at $1.3613, and U.K. 10-year borrowing costs dropped 1 basis point to 0.53%

Fuel sales fell for the first time since February, partly due to wet weather that cut the volume of traffic on roads. Food sales also declined as the lifting of restrictions on hospitality boosted spending in bars and restaurants and also normalized after a surge during European champion soccer games in June, the ONS said.

What Bloomberg Economics Says ...

“An unexpected plunge in retail sales data for July suggests little benefit to the sector from the removal of restrictions in England. Still, there remains pent-up consumer demand and many households are flush with savings amassed during successive lockdowns. This is likely to support the recovery in the coming months.”

--Niraj Shah, Bloomberg Economics. Click for the full REACT. 

Other non-food stores including chemists, toy stores and sports equipment shops reported a 10.1% drop in sales, the first since February. Despite the slowdown, retail sales are still 5.8% above pre-pandemic levels.

“Tepid retail sales growth is especially dismaying given international travel is still minimal,” said Jessica Moulton, a senior partner at McKinsey & Co. “Travel is consumer’s number one use of discretionary spend. That’s a lot of extra purchasing power which retailers should have been benefiting from.” 

Public Finances

A separate report showed U.K. government borrowing in the first four months of the fiscal year was running at little more than half the level a year earlier as the economy returned to normality after months of restrictions. 

The budget deficit stood at 78 billion pounds ($106 billion) between April and July, That compared with 139.7 billion pounds in the same period of 2020, when the economy was under siege from the coronavirus pandemic.

“Our recovery from the pandemic is well underway,” said Chancellor of the Exchequer Rishi Sunak. “But the last 18 months have had a huge impact on our economy and public finances, and many risks remain.”

Retailers have warned that they face headwinds in the form of staff and goods shortages caused by the pandemic and Britain’s departure from the European Union. 

While Brexit made difficulties in importing products of all kinds, a surge in coronavirus infections forced millions of workers to isolate at home, drying up the pool of available labor that was already hit by departures of foreign workers.

“Challenges in global shipping and the shortage of U.K. lorry drivers are creating some disruption for consumers and additional costs for retailers,” said Helen Dickinson, chief executive of the British Retail Consortium. “In October, the U.K. will introduce new checks on products of animal origin being imported from the EU, adding more costs to the system. Government must take action on these issues.”

After a brief splurge of euphoria earlier this month that generated some of the strongest growth for retailers on record, spending patterns have shifted in recent weeks. 

A survey by Barclaycard, which handles almost half the nation’s credit and debit card payments, showed more money going into bars, theaters and sporting events and less into face-to-face retail. The British Retail Consortium says preferences are shifting toward social gatherings that spend most of the past 18 months under harsh restrictions.

A separate report from GfK showed consumer confidence dipped slightly in August. Greater optimism about personal and national economic outlook was overshadowed by a decline in people saying now was the “time to buy” for large purchases. 

“If you had the luxury of savings, people look at it and had a warm glow of security. So I don’t think we’re going to go crazy and spend it all overnight,” Joe Staton, client strategy director at GfK, said by phone. He added that inflation for household items might come with people saving so they have “a buffer in place in case prices do go up.”

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