- Retail sales volumes dropped by 2.7 per cent in May, the sharpest decline since December 2023.
- Consumer sentiment improved in May, but this did not translate into increased spending.
- The outlook for consumer spending growth is less optimistic due to rising inflation and a cooling labour market.
British retail sales volumes recorded their sharpest drop since December 2023 last month, as demand fell back after shoppers splurged on food, summer clothes and home improvements the month before, official figures showed on Friday.
Retail sales volumes dropped by 2.7 per cent in May, the Office for National Statistics said, a much sharper decline than the median forecast of 0.5 per cent in a Reuters poll.
Sales volumes were 1.3 per cent lower than a year earlier, the biggest drop since April 2024 and well below a Reuters poll forecast for 1.7 per cent annual sales growth.
April data had shown robust sales growth after demand was boosted by unusually sunny weather for the time of year and GfK consumer sentiment data for June, released earlier on Friday, showed the highest sentiment so far this year.
Despite the improvement in consumer confidence in May, this didn’t manage to translate into spending as nervousness remains and consumers hit pause on retail spend and squirreled away their money instead,” Jacqui Baker, head of retail at RSM UK and chair of ICAEW’s Retail Group, commented.
“Clothing and footwear inflation rose 0.8 per cent month-on-month in May as Easter sales came to an end. However, unfortunately for some retailers, they have been left with little choice but to bring forward the next sales cycle as they struggle to shift stock.
“Online took a hit in May, which could be partly due to the cyber incidents that have recently unfolded in the retail sector. Despite this shift in behaviour, it didn’t translate into a much-needed boost to high street footfall.”
However, reports from retailers have been more mixed. The British Retail Consortium said earlier this month that sales growth slowed sharply in May as shoppers had done much of their summer purchases a month earlier.
Updates this month from major British retailers have been mixed. Tesco, the country's biggest food retailer, beat expectations for first quarter sales, despite what it called an "intensely competitive" market. However, struggling discounter Poundland said it plans to close 68 stores.
Week food sales
Baker said sales could see another uptick in June with consumer confidence on the rise, the holiday and festival season fast approaching, and favourable weather.
“The concern will be that if inflation persists in areas that directly impact household budgets, this could delay any meaningful recovery in consumer confidence and in turn, sales in the coming months,” she noted.
Thomas Pugh, chief economist at RSM UK, added: “After shrugging off the initial bout of tax and tariff turmoil in April, the sharp drop in retail sales volumes in May suggests that consumers became much more reluctant to spend last month. That represents a downside risk to our forecast of 0.2 per cent q/q growth in Q2. Admittedly, much of the weakness was in food sales, which looks like a payback from a surge in April. But sales volumes dropped across the board suggesting genuine weakness.
“Looking ahead, the outlook for consumer spending growth is less rosy than it has been in the first half of the year. Inflation is now back at 3.4 per cent and will rise further over the summer, mainly driven by tax rises, higher utility bills and now more expensive petrol. That will eat into consumers’ disposable income. At the same time, the labour market is clearly cooling. This will weigh on wage growth and employment over the rest of the year.
“However, the outlook is far from dismal. Despite rising inflation and slower wage growth, real incomes will still rise at a reasonable pace this year. Household balance sheets are considerably stronger than they have been previously, and lower interest rates will continue to help. What’s more, there are good signs that the worst of the labour market pain and tariff uncertainty is already behind us.
“The determinant of spending growth in the second half of the year is likely to be whether consumer confidence continues to rebound and households ease back on their extraordinarily high saving rates. There is some good news, with consumer confidence rising to its highest level since December in June.”
