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UK Shoppers Rescued Economy from Contraction in Second-quarter, Economists Say 

© IRStone, Adobe Stock

- UK retail sales surged in June, reversing earlier falls.

- Sales grow 0.7% in quarter, after strong first-quarter.

- Online sales growth eases as store retailers rebound.

- Shoppers seen rescuing economy from contraction.

Retail sales figures for the month of June took the financial markets by surprise Thursday when revealing a sharp increase in spending on the high street, giving number-crunchers in the City reasons for cheer as most had feared that the economy contracted in the second-quarter. 

Retail sales rose by 1% in June, when markets were looking for a 0.3% fall to build on the downwardly-revised 0.6% contraction seen in May. June's increase more than reversed the earlier 0.6% fall and 0.1% decline from April.

Sales volumes rose 0.7% in the second-quarter overall, adding to the 1.8% gain seen in the opening three months of the year. Struggling store retailers also appeared to be winners during the recent month because online firms saw their share of all retail spending fall from 19.3% in May to 18.9% during June. 

"The 1.0% m/m rebound in retail sales volumes in June (consensus -0.3%) is a big relief and shows that there is some life in households yet. It also suggests that the overall economy may have avoided a contraction in Q2," says Paul Dales, chief UK economist at Capital Economics. "It suggests that the weakness in April and May was just a temporary payback from the strength in Q1 rather than the start of a much weaker underlying trend."

Economists care about the data because it reflects rising and falling demand in the economy, which is key to the outlook for the consumer price pressures that central banks are attempting to manipulate when they tinker with interest rates. 

Currency markets care about changes in interest rates, as well as the outlook for them, can have a significant influence over international capital flows as well as speculative short-term trading activity.

Capital flows tend to move in the direction of the most advantageous or improving returns, with lower rates normally seeing investors driven out of and deterred away from a currency while rising rates have the opposite effect.

"June’s retail sales figures are a timely reminder that consumers aren’t being haunted by the possibility of a no-deal Brexit, but are happy to spend the proceeds from rising growth in the real wages. June’s increase in sales wasn’t flagged by any of the surveys," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Looking ahead, retail sales should retain their recent momentum."

Above: UK retail sales growth alongside wage growth rate. Source: Pantheon Macroeconomics.

Thursday's data came at a time when speculation over the health of the economy has been mounting. Many economists have forecast an economic contraction for the second-quarter while almost all have said the economy will have stalled if it didn't shrink. 

GDP figures released earlier in July showed output rising just 0.3% in May, after already having fallen a larger 0.4% in April, which rattled economists. Those figures mean the economy has had to run faster in order just to stand still for the three months to the end of June. 

However, consumer spending accounts for a large portion of GDP so a strong finish to the quarter could help produce the additional 0.1% gain needed for a contraction to be avoided. Capital Economics says increases in spending are the result of recent strong, above-inflation pay rises and that the economy's prospects are now improved.

Above: GB 10-year and 2-year (orange) government bond yields, falling since May as Brexit risk rises. 

"The strength of retail sales in Q1 and the above-average level of households’ confidence in the outlook for their personal finances in June suggest that consumers will remain deaf to the warnings about a no-deal Brexit and only pare back their spending if it happens.  Accordingly, we continue to expect solid growth in consumers’ spending to ensure that GDP grows at around its trend rate this year, despite further weakness in business investment," says Pantheon's Tombs. 

The UK economy is on course for another slowdown this year, which many attribute mainly to a Brexit process that's dragged on beyond the original March 29 Article 50 deadline and that could yet result in a 'no deal' Brexit. Preparations for the delayed departure, as well as the after effects of them, have impacted growth to the up and downside this year, but the UK economic slowdown is not occurring in isolation. 

The global economy has been forced onto its back foot in the last year by challenges and uncertainty thrown up by the trade war between the U.S. and China, which has hit the Eurozone noticeably and has now also got the Federal Reserve (Fed) on the verge of cutting its own interest rates. Eurozone GDP growth fell from 2.3% to 1.8% in 2018 and the European Commission forecast just last week that it'll slow to 1.2% this year. The commission forecasts UK GDP growth of 1.3%, down from 1.4% in 2018.

 

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