The rise in retail sales in July was fairly encouraging and supports our view that the economy has picked up in Q3 after contracting by 0.2% q/q in Q2.
Reasonable start to Q3
- The rise in retail sales in July was fairly encouraging and supports our view that the economy has picked up in Q3 after contracting by 0.2% q/q in Q2.
- Indeed, July’s 0.2% m/m rise in retail sales volumes beat the consensus forecast of a fall of 0.2% m/m. What’s more, the increase came on the heels of a strong 0.9% m/m rise in June.
- Admittedly, the rise was not broad-based. While, non-store retailing rose by a whopping 6.9% m/m thanks to online promotions, and spending in department stores increased for the first time this year by (1.6% m/m), most other sectors saw declines. (See Table 1.)
- Household goods in particular had a poor month falling by 5.4% m/m, reflecting the weakness in housing market activity. Clothing sales also fell by 0.2% m/m despite warmer than usual weather in July. Indeed, we already knew from the CPI data that the summer clothing discounts were smaller this year than last.
- But even if sales fail to rise in August and September, retail sales would still rise by 0.7% q/q in Q3 as a whole, the same as in Q2. (See Chart 1.) Of course, the retail sector only makes up about 30% of total household spending. But other indicators suggest that spending growth off the high street appears to have remained fairly steady. So July’s figures leave us a little more confident that the economy avoided another contraction in Q3. We have pencilled in a 0.4% q/q rise in GDP in Q3.
- As ever, the outlook further ahead depends on what happens with Brexit. If there is a no deal, consumer spending growth would probably fall. But wage growth rose to an 11-year high in June, jobs growth was still buoyant and inflation remained close to the Bank of England’s 2% target. So if there isn’t a no deal, we see no reason why household spending should continue to underpin growth in the economy.
Chart 1: Retail Sales Volumes
Source: Refinitiv, Capital Economics
Table 1: Retail Sales Volumes
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Gabriella Dickens, Assistant Economist, +44 20 3974 7421, email@example.com