Retail sales reveal consumer slump

16th June 2011

Retail sales dived by twice the expected rate in May as consumers cut their spending on clothes and other non-food items to pay for higher petrol prices as the difficult economic outlook kept consumers away from the high street.

Sales volumes dropped 1.4%, more than reversing the 1.1% increase in April that was mainly attributed to the royal wedding and unseasonally warm weather.

The slump in retail sales in May does not bode well for GDP growth in the second quarter and further increases the chances that the Bank of England will delay raising interest rates until 2012.

Another report in the Daily Telegraph details various economists' reaction to the ONS data. For example, Vicky Redwood at Capital economics says: "May's sharp drop in the official measure of UK retail sales provides further evidence that April's pick-up in high street spending was just a temporary reflection of the warm weather, Royal Wedding and extra bank holiday … accordingly, the underlying trend in sales over the past several months still looks broadly flat at best."

The ONS said that food and fuel now accounted for more than half of all spending, adds a BBC report.

However, the ONS said that May's figures showed consumers were now cutting back because of the tough economic climate, worries about rising fuel prices and job uncertainty.

Food expenditure was down 3.5% in May, and this was the biggest monthly decline in food store sales since June 2008, says the BBC report.

The figures chimed with warnings from major food retailers earlier in the week, says the report. Tesco had said that UK sales were subdued, blaming high fuel costs and the "cautious consumer environment", while Sainsbury's also warned that rising fuel costs were reducing the amount of money people had available to spend.

Guy Walker, equity analyst at Schroders, says: "The slump isn't a surprise although it is a shock to see food sales are weak – this is quite unusual. People are being squeezed with high fuel prices and being more economical. This will most likely mean recovery is sluggish."  

Simon Ward, chief economist at Hendersons, adds: "You could argue that the weakness in real spending is due to the Bank of England failing to control inflation, rather than a justification for it to continue to keep rates at rock bottom levels." However, he is sceptical that the consumer is a cause of major concern in economic recovery.

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