24 Apr 2017

UK retail sales slump as consumers feel the price squeeze

Philip Shaw

Chief Economist

Official retail sales figures for March painted a downbeat picture of UK consumer spending in the first few months of 2017. Headline retail sales fell 1.8% month to month whilst consensus and Investec forecasts had been for a 0.5% decline. The annual increase in sales fell from 3.7% to 1.7%.

Stripping out fuel sales, volumes were down 1.5% month to month whilst the annual increase dropped from 4.1% from 2.6%. The Office for National Statistics does its best to adjust for Easter timing effects on sales patterns, but these adjustments are not perfect and so Easter timing might have provided an additional drag on the March figures. But even bearing this in mind, it is difficult to put a positive spin on today’s figures. Across the first quarter overall retail sales were down 1.4% q/q which was the weakest calendar quarter in 7 years.

The story is one of UK consumers feeling the squeeze following the impact of the post-referendum falls in the Pound on import prices and on prices consumers are now facing on the High Street. Indeed the Office for National Statistics noted that weak retail sales in Q1 seemed to be ‘a consequence of price increases across a whole range of sectors’. Indeed our chart (please click here, Chart 1) demonstrates how the decline in retail sales is being driven by rising price pressures as the price deflator rose by 3.3% y/y in March; it’s largest increase in 5 years.

The downbeat spending picture in Q1 has also been reflected in other retail reports this month. The British Retail Consortium (BRC) retail sales monitor, which puts sales in values rather than volumes terms, indicated that, in the three months to March, total retail sales rose by just 0.1%, the weakest year over year growth rate since Q4 2008.

As households are faced with a squeeze from rising prices, they tend to focus their income on the more essential items of spending and we are already seeing signs of this. Indeed, in the recent BRC report non-food retail sales values were markedly weaker than food sales, falling by 0.8% per cent on a year earlier in Q1, whilst food sales were 1.2% higher over the same period. The picture is less pronounced in the ONS numbers, although we note that over the quarter ‘predominantly food stores’ sales saw a less marked squeeze that the ‘predominantly non-food’ category.

We see inflation continuing to edge higher as we move towards the summer, reaching around 3%, and exerting a continuing squeeze on real household spending. The latest figures for pay showed wage growth of 2.3% (3m yoy). At present, there is little serious evidence of a material upward trend in pay growth emerging to offset the pressure from higher inflation. Furthermore, note that the national accounts figures for Q4 2016 showed that the household saving ratio fell to 3.3% in Q4 from 5.3% in Q3, the lowest level since records began in 1963, further limiting the capacity of households to maintain spending momentum. As such we expect this squeeze on consumer spending momentum to contribute to a slowdown in the quarterly pace of growth over the year ahead, starting with next week’s Q1 preliminary GDP figures; we are forecasting +0.4% q/q from +0.7% in Q4 2016.