On the face of it, the rebound in retail sales in advanced economies suggests that the consumer sector is leading a V-shaped economic recovery. But other types of spending, including on consumer services, has been far weaker, and the import-intensity of the retail revival has meant that some of the economic benefits have been felt in China rather than in the DMs themselves.
- On the face of it, the rebound in retail sales in advanced economies suggests that the consumer sector is leading a V-shaped economic recovery. But other types of spending, including on consumer services, has been far weaker, and the import-intensity of the retail revival has meant that some of the economic benefits have been felt in China rather than in the DMs themselves.
- The rebound in retail sales volumes has been impressive – in August, sales were above their pre-virus level in the US, the euro-zone, the UK, and Japan. (See Chart 1.) Perhaps unsurprisingly, the rapid recovery has been largely driven by a surge in online sales, as spending has shifted away from the high-street. Sector breakdowns from major DMs showed that non-store sales were between 20% and 40% above their pre-virus levels in August. (See Chart 2.) Other areas of spending that have outperformed are spending on household goods including furniture, DIY, and other durables. In the US, for instance, monthly consumption data showed that furniture sales were 7% above February’s level. (See Chart 3.)
- That said, there are reasons why the retail sales data are giving a false sense of optimism. For one thing, some of the goods that have seen the strongest recovery are relatively import-intensive – 40% of the products sold on Amazon, for instance, are manufactured in China. This means that the boost to the domestic economy has been smaller than the rebound in sales might suggest. Relatedly, note that China’s trade surplus has increased substantially since the start of the year, while the US trade deficit has widened. (See here and Chart 4.)
- What’s more, while spending on goods has held up well, spending on services – which accounts for the majority of total consumer spending in advanced economies – still appears to be very weak. This is unsurprising given that such areas of spending as restaurants, transport, and recreation, are particularly vulnerable to government restrictions and consumer caution.
- In the US, for instance, monthly consumption data for August showed that spending on food and accommodation services remained around 18% below its pre-virus level, and spending on transport and recreation was even weaker. And the retail sales data for September, released today – which, unlike in other DMs, include sales from restaurants and drinking places – showed that nominal spending on food and drink services was still 15% below its January level last month. (See Chart 5.)
- Data are sparser elsewhere, but numbers published by the French statistics office painted a similar picture. While consumer spending on electronic items was well above its level from the start of the year in August, spending on leisure, accommodation, and restaurants remained depressed.
- We doubt that these areas of spending will see rapid recoveries any time soon. Admittedly, domestic businesses will continue adapting to containment measures to some extent, but many of these changes will take time to implement. And given that new infections have surged across Europe over the past month or so, spending on consumer services and in high-street stores may be set to weaken again in the meantime. Timely Google data show that visits to retail and recreation sites have already fallen in the past few weeks.
- Even the boost from online spending cannot be taken for granted. After all, with unemployment set to rise in the euro-zone and the UK as government support is withdrawn, incomes will suffer in the months ahead. And even in the US, where we expect the jobless rate to fall steadily over the next year or so, unemployment looks set to remain above pre-virus levels, which will keep pay growth subdued.
- All told, while retail sales are likely to remain fairly resilient, total consumption will take longer to return to pre-virus levels. (See Chart 6.) In the US, we expect consumption to reach pre-virus levels by the middle of next year. But weaker labour markets in the euro-zone and the UK mean that it will take longer for consumption to return to pre-virus levels.
Chart 1: Retail Sales Volumes (Dec 2019 = 100)
Chart 2: Non-store Retail Sales Volumes
Chart 3: US Real Consumption (% Change Feb to Aug)
Chart 4: Goods Trade Balance (% of world GDP, ann.)
Chart 5: France Consumer Spending (Q4 2019 = 100)
Chart 6: Consumption Forecasts (Q4 2019 = 100)
Sources: Refinitiv, Capital Economics
Gabriella Dickens, Global Economist, email@example.com