UK attention to retail: Sunny weather and the royal wedding drive buoyant retail sales in May, however tough trading conditions persist

July 12, 2018

Following a lacklustre start to 2018, retail spending bounced back in May as the industry experienced its strongest performance in close to 18 months. The Office of National Statistics (ONS) reported value and volume growth of 6.1% and 4.4% respectively when compared with the same month last year, driven by a combination of the sunniest and warmest May on record, two bank holidays and the royal wedding.

Whilst this reflects welcome good news for the industry, the broader backdrop for the sector remains extremely challenging and we have seen a number of firms hit financial difficulty in 2018, with the likes of House of Fraser, Poundworld, Carpetright, The Original Factory Shop and New Look all entering into company voluntary arrangements (CVAs) or administration – with more likely to follow.

On a trailing 12 months basis, sales volume growth has actually declined over the last 15 months, from 4.5% in March 2017, to 1.6% most recently. Whilst sales value growth remained between 4-5% across this period, the differential above volume growth largely reflects the spike in inflation experienced following the EU referendum, where many UK retailers were unable to mitigate the impact of the sharp depreciation in the pound and forced to pass on higher import costs to consumers. Indeed, PantheonMacro commented, "The jump in retail sales in May has all the hallmarks of a weather-related blip, rather than a sustainable pick-up in spending."

Whilst unemployment remains at record low levels, real wages have only just begun to move back into positive territory, house price growth recently dipped to the lowest levels in five years and unsustainable levels of household debt continue to weigh down on consumer confidence. Furthermore, with growing speculation that a rise in interest rates could be waiting around the corner, the UK's retailers' should remain wary that the uptick in spending may yet prove to be short-lived.


The ONS reported that the unemployment rate remained at 4.2% in the three months to April, the lowest rate since 1975. Earnings growth (including bonuses) dipped slightly to 2.5%, albeit this is still higher than the latest CPI inflation rate (2.3% in May) which indicates that the squeeze on real wages experienced by the UK's consumers earlier in the year is showing signs of subsiding.

Following an extended period of historically low unemployment, The Bank of England has stated that it expects inflationary pressures to build in the labour market, however as indicated by the fall in earnings growth above, this doesn't appear to be happening. One explanation given by leading labour market experts David Blanchflower and David Bell, highlights the potential of ‘underemployment' in the UK economy, i.e. individuals who would work longer hours if they could. The duo argue if the current unemployment rate took into account underemployment, it would be 7.7% rather than 4.2%, suggesting that the uptick in wage growth predicted by the BoE may not be as imminent as expected.


Unsecured consumer borrowing rose to £211.6 billion in May which reflects growth of 5.9% when compared to the same month in the prior year. Whilst the rate at which the UK's consumers are piling on additional debt has slowed from around 8.0% 12 months ago, the current rate of borrowing still appears unsustainable against a backdrop of real wage growth close to zero.

The mounting consumer debt bubble has exerted pressure on the Bank of England to raise interest rates for the first time in close to a decade, in an attempt to temper the appetite of the UK's consumers for cheap debt, contain inflation and prevent the economy from overheating. The Bank of England already put off increasing the rate earlier this year, when weaker-than-expected economic growth forced it to back-track on its plans. Following indications of a stronger labour market and economic growth, the current message from Threadneedle Street indicates that a rate rise could well be waiting around the corner in August.


The Met Office reported that May 2018 was the sunniest and warmest since records began in 1910, however, this was still not enough to reverse the ongoing decline in footfall, as the number of visitors to the UK's high streets and other retail centres declined by 2.6% when compared with the same month last year.

London bucked the trend in dramatic fashion with the city experiencing a 27.0% positive increase as the royal wedding caused tourism in the city to sky-rocket. On the other end of the spectrum, South West England and Wales experienced a particularly sharp decline of 8.3%.


Annual house price growth dipped to 2.4% in May according to the latest data from Nationwide. Growth has now slowed to the lowest rate in five years, with London remaining an area of particular weakness and property experts commenting that buyers in London are now sensing "blood in the water" and increasingly forcing sellers into steep price cuts.

Jonathan Hopper at Garrington Property Finders commented "London is paying a painfully high price for its stellar run of price rises and a correction is now under way in several parts of the capital." The extent to which this could damage retail spending in London remains to be seen, although some may be hopeful that the prominent role of tourism in driving retail sales in the city may shield its retailers from a potential decline in the local property market.

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