There has been an encouraging rebound in retail sales across advanced economies as lockdowns have eased, driven by a pick-up in sales of discretionary items such as clothing and furniture and a shift towards online sales. While the recovery should continue, its pace will be limited by higher unemployment and easing government support. And discretionary spending is vulnerable to renewed virus outbreaks.
- There has been an encouraging rebound in retail sales across advanced economies as lockdowns have eased, driven by a pick-up in sales of discretionary items such as clothing and furniture and a shift towards online sales. While the recovery should continue, its pace will be limited by higher unemployment and easing government support. And discretionary spending is vulnerable to renewed virus outbreaks.
- It is no secret that the coronavirus has dealt a heavy blow to retail spending. All of the major advanced economies saw sharp declines in real retail sales in March and in April as stores closed or people stayed away of their own volition. (See Chart 1.) Over the two months combined, sales collapsed by 20.0% in the US, 22.7% in the UK, 21.4% in the euro-zone and 14.1% in Japan.
- Spending on some non-discretionary goods such as food and medicine held up well or even increased during the lockdown period. But sales collapsed in pretty much every other area of spending. (See Charts 2 & 3.) The virus has clearly accelerated the trend towards online shopping, with non-store sales up by between 20% and 50% in May compared to February. (See Chart 4.) However, the move online has not been enough to offset weakness elsewhere. In the UK, for example, online sales account for just 9% of total retail spending, so the 25% increase in March and April offset only 2.2%-pts of the 22.3%-pts drag from in-store, non-essential spending. In-store clothing sales suffered sharp declines of up to 80% in the advanced economies, while spending on furniture, electronics, and leisure goods also fell sharply.
- Since lockdowns have started to ease, though, the bounce-back in sales has been impressive. May’s data showed an 17.9% m/m rise in the US, a 17.8% jump in the euro-zone, and a 12% rise in the UK. And today’s data from the US showed that retail sales values rebounded a further 7.5% in June. (See here.) The exception was Japan, where the rise in retail sales was much smaller at 2.2%. But this followed a more modest drop earlier in the year and seems to reflect the fact that lockdowns started and ended later in Japan. As of May, real retail sales were still below their pre-virus levels. (See Chart 5.)
- There are three reasons why we expect the pace of the recovery in sales to slow in the coming months. First, aggregate incomes are set to remain lower than they were pre-virus as government income support schemes are gradually pared back and unemployment settles at above its previous rates. Second, while consumer confidence has started to creep back up in most places, it is still low compared to past standards.
- Third, the bounce in retail sales has been driven by a rebound in the worst affected areas of spending during the lockdowns. In the euro-zone, for instance, having fallen by a combined 80% in March and April, clothing sales jumped by 147% m/m in May. (See Chart 2 again.) The increase partly reflects the fact that consumers finally made some purchases they were forced to delay. And since these areas of spending were the most affected by rising infections in the past, sales look vulnerable to future outbreaks.
- In the US, the renewed upturn in infections in the so-called Sun Belt states has already affected the retail sector. After rising steadily since mid-April, consumer footfall at retail stores has edged down recently, not only in the states that have re-imposed restrictions but in those where lockdowns are easing too. (See Chart 6.) It seems that the rise in infections has prompted consumers to exercise caution about going out to spend.
- Our central assumption is that recent outbreaks will remain relatively localised and that nationwide store closures will not be required in the US or other major advanced economies. But there are clear downside risks. And even if this sanguine assumption proves correct, continued consumer caution and lingering social distancing measures within stores are likely to limit the pace of the recovery in retail.
- In all, we expect the recent pick-up in retail sales to lose pace in the coming months. Much more detail about the five-year outlook for the retail sector (and others) can be found in our new suite of Sector Reports.
Chart 1: Real Retail Sales (% m/m)
Chart 2: Euro-zone Real Retail Sales Breakdown (%m/m)
Chart 3: US Retail Sales Values Breakdown (% m/m)
Chart 4: Non-Store Sales (Jan 2019 = 100)
Chart 5: Real Retail Sales (% diff. from February)
Chart 6: US Retail Footfall (20th Jan = 100)
Sources: Refinitiv, Capital Economics
Gabriella Dickens, Assistant Economist, email@example.com