Retail Sales Have Pulled UK Out of Recession, and Brighter Days Lie Ahead

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UK retail sales were flat in February, but this was better than expected and underscores a trend of improvement that means the UK economy has exited recession.

Although retail sales read at 0.0% month-on-month in February, this was above consensus expectations for a reading of -0.3%, and the already impressive January figures were revised higher to 3.6% from 3.4%.

"Retail sales are on track to drag the economy out of recession in Q1," says Robert Wood, Chief UK Economist at Pantheon Macroeconomics.

December's -3.2% m/m figure - which undershot expectations for -0.5% - was responsible for tipping the UK into a technical recession in the second half of 2023.

"Retail sales volumes are on track to rebound strongly in Q1, helping the economy leave last year’s recession behind, as falling inflation boosts consumer spending power," says Wood.

Improving consumer sentiment has been signalled for some time, with GfK's industry-leading consumer confidence survey showing a notable uptick to two-year highs over recent months.

Increases in consumer confidence are typically associated with increased spend no goods and services. "We have seen signs of increased outlays in the past two months," says Mateo Agustin at gaming platform Bodog.

"Brighter days are ahead for the UK consumer," says Ellie Henderson, an economist at Investec.

February's retail sales outturn was all the more impressive owing to the wet February that deterred shoppers from the high street. The Met Office reports southern England saw its wettest February since 1836.

Economists say the ongoing fall in inflation and elevated pay increases make for an ongoing improvement in real incomes that can boost retail sales in the coming months.

"Even if sales volumes growth was flat again in March, on a quarterly basis retail sales growth would be comfortably positive in the first quarter of the year. This supports our call that the UK economy returned to growth in Q1," says Henderson.

"In fact, sales volumes would need to fall by as much as 5.0% m/m in March for sales to not rise in Q1 overall," says Alex Kerr, Assistant Economist at Capital Economics.

If anything, the mild March weather suggests a bounce-back could be in store this month as shoppers compensate for a weather-hit February.

Bank of England Governor Bailey said Thursday that the economy is already recovering from the small technical recession it experienced in the second half of last year.

He also endorsed market pricing for interest rate reductions, stating that it is "not unreasonable" for the curve to price in interest rate cuts this year, something that will boost the outlook for the retail sector.

"In all, we remain comfortable with our view for a first interest rate reduction in June," says Henderson.

Pantheon Macroeconomics says the stars are aligning for stronger consumer spending growth this year.

"Real household disposable income is picking up smartly as inflation falls, the MPC continues edging to a summer rate cut, and the housing market is returning to life too," says Wood.

"The retail recession will end in Q1 and will aid the wider economic recovery. Moreover, the prospect of interest rate cuts and the boost to real household incomes from lower inflation and the 2p cut to national insurance in April suggest the recovery in real consumer spending will continue throughout this year," says Kerr.

Consumer confidence figures for March were also released Friday, revealing improved optimism. The UK's longest-running consumer confidence survey from GfK revealed the Personal Financial Situation Over The Next 12 Months measurement has risen to +2, which is a significant improvement on the -21 score from March last year.

"This is welcome news given the challenges faced by Britons of fiscal drag, higher costs for fuel, rising council taxes and utilities eroding any increases in wages or other income," says Joe Staton, Client Strategy Director at GfK.

Staton explains this metric is key to understanding the financial mood of the nation because confident householders are more likely to spend despite the cost-of-living crisis.

The survey's headline Overall Index Score remains stalled at -21 having steadily improved through 2023. In January, this measure hit a two-year high at -19.

The survey shows consumers' view of the wider economy over the past year is down in March and the Savings Index has dived four points, suggesting little lift from the Spring budget.

"Are we temporarily on pause, or are consumers about to press 'reverse'? In the run-up to the next UK General Election, these are important questions for the future health of the economy," says Staton.

Economists at Investec say the forward-looking personal financial situation moved into positive territory for the first time since December 2021, confirming respondents are increasingly optimistic about their personal finances.

This "could have been influenced by the further 2p cut to employees' National Insurance contributions announced in the March Budget," says Ellie Henderson, an economist at Investec.

She notes, however, that respondents still appear to be downbeat over the past and future economic situation, with the sub-indices at -45 and -23, respectively.

Meanwhile, the major purchase index also fell by two points to -27, constraining the overall index.

"We do expect consumer confidence to break out of its current tight range in the coming months, though, and retail activity to rebound," says Henderson.

"The prospect of interest rate cuts and the boost to real household incomes from lower inflation and the 2p cut to national insurance in April suggest the recovery in real consumer spending will continue throughout this year," says Alex Kerr, Assistant Economist at Capital Economics.