British retail sales unexpectedly rose in February, figures from the Office for National Statistics showed on Friday, defying most forecasts from analysts who had predicted a fall against a backdrop of weak overall growth in the economy.
Sales volumes increased by a monthly 1.0 per cent, driven by non-food sales although supermarkets saw a drop after a surge in business in January, the Office for National Statistics said.
A Reuters poll of economists had pointed to a monthly fall of 0.4 per cent in sales volumes. The ONS revised January's month-on-month increase to 1.4 per cent from an initial 1.7 per cent.
“It was a positive month for household goods stores with their largest rise since April 2021, driven by hardware store sales,” ONS senior statistician Hannah Finselbach said, adding clothing sales also picked up due to widespread discounting.
Separate ONS data showed British households saved more money as a proportion of their income at the end of 2024 than at any point in nearly 15 years, apart from during the COVID pandemic.
The household savings ratio rose to 12 per cent in the fourth quarter of 2024, up from 10.3 per cent in the third quarter.
That bank of savings - and the possibility it could be unlocked - is one reason why some economists think tepid economic growth can pick up later in the year.
The ONS on Friday confirmed the economy expanded by 0.1 per cent in the fourth quarter of 2024.
Retail sales volumes for the three months to February rose by 0.3 per cent, the first increase by that measure since the three months to November.
How the economy fares after the imposition of tax hikes on employers, higher regulated energy bills and a raised minimum wage - all taking place next month - is a key question for policymakers.
"Food inflation remains high, meaning consumers are buying less, and retailers will be feeling cautious in the build up to changes to wage costs next week," said Oliver Vernon-Harcourt, head of retail at Deloitte.
Retail sales were 2.2 per cent higher than a year earlier, compared with the median poll forecast for 0.5 per cent annual growth.
This week, clothing retailer Next raised its profit outlook after better than expected trading. But home improvement retailer Kingfisher said consumer sentiment had been dented by measures in the government's budget last October.
The ONS data highlighted a stark contrast between food and non-food sectors, with the latter seeing 3.1 per cent increase in sales volumes. In contrast, food sales volumes fell by 2.0 per cent. Clothing sales showed a rebound, increasing by 2.3 per cent after a previous month's drop.
“Retail sales volumes came in better than expected in February. The trends from last month effectively reversed with food sales falling after a very strong January and non-food categories rebounding following last month's weakness,” Charlie Huggins, manager of the quality shares portfolio at Wealth Club, observed.
“These figures, along with yesterday's better-than-expected results from retail bellwether Next, indicate that consumers are still feeling confident enough to spend despite the gloomy economic headlines.”
However, he cautioned that “retailers are having to work harder than ever before” through “increased levels of discounting,” which could impact profit margins.
Consumer confidence improving
Jacqui Baker, head of retail at RSM UK and chair of ICAEW’s Retail Group, echoed this sentiment, stating, “Resilient retailers have dusted themselves off after a challenging December and seen incremental growth at the start of the year. Consumer confidence is improving and widespread discounting has tempted consumers to spend – renovating homes and gardens, bagging the latest iPhone or hitting the sales to update their wardrobes.”
She also pointed to a “20 per cent annual jump in sales” for jewellers, potentially linked to “a gold rush due to rising inflation and economic uncertainty.”
Thomas Pugh, economist at RSM UK, added: “There are finally some signs that the UK consumer is starting to come back to life. Consumer confidence ticked up again in March and the services PMI jumped higher, partly because of strong demand from consumers.”
He anticipates that “strong real household income growth should continue to drive a gradual increase in retail sales this year, even if overall economic growth remains relatively subdued.”
Despite the positive figures, concerns remain about the broader economic landscape. Silvia Rindone, EY UK&I Retail Lead, commented that the February’s retail sales figures continue to reflect a challenging landscape for retailers.
“Despite real wages continuing to grow at a fast pace, this increase has not yet translated into higher consumer confidence, which remains subdued. Ongoing geopolitical tensions and rising wage costs has meant retailers are continuing to navigate an uncertain trading environment,” she said.
However, she expressed optimism for “Easter and school holidays on the horizon” as potential sales boosters, while advising retailers to “remain agile and focused on customer-centric strategies” to navigate the ongoing economic uncertainties.
