UK attention to retail: rising costs drive strong value growth in May, however sales volumes remain weak

July 6, 2017

The UK retail sector experienced strong value growth in May, as prices continued to climb as a result of rising import costs. Although high value growth may look positive for the industry, in reality, the cost-driven nature of this growth and relatively flat sales volumes gives retailers little to cheer about.

The Office of National Statistics (ONS) reported value growth of 3.5% and volume growth of 0.6% when compared with the same month last year. When the results were announced, the worse than expected growth in sales volumes—the lowest since April 2013—triggered the steepest daily fall in the FTSE 250 since summer 2016.

Sluggish volume growth and constricting margins in the sector stem from a multitude of significant challenges facing the UK economy; inflation continues to outstrip earnings growth, squeezing real wages by an estimated 0.6% in the three months to April.1 Commenting on the data, Pantheon Macroeconomics noted that “May’s retail sales figures confirm that consumers are struggling to spend more now that real wages are falling at the fastest rate for three years.”

Furthermore, many experts, including former Bank of England official Kate Barker, have grown increasingly concerned that years of ultra-low interest rates have encouraged unsecured credit to snowball. Unsustainable levels of consumer debt have been identified as a key aggravating factor in the financial crisis. Given the myriad of pressures mounting on the sector, retailers will hope that history won’t repeat itself almost a decade later.


The ONS reported that the UK unemployment rate remained unchanged at 4.6% in the three months to April, the lowest level in 42 years. However, strong employment was over-shadowed by a second consecutive month of falling real wages.

Regular pay adjusted for inflation fell by 0.6% in the three months to April, with economists expecting that the pay squeeze may accelerate in the coming months, as inflation is expected to rise above 3%.

Fragile wage growth since the financial crisis has done little to help the UK retail sector, and the average employee now actually earns less in real terms than in March 2008, six months prior to the collapse of Lehman Brothers.

Consumer credit

The latest data from the Bank of England indicates that unsecured borrowing rose to £199.7 billion in May, which reflects growth of 8.0% when compared with the same month last year.

Growth in consumer credit has accelerated in recent months, and the Bank of England believes struggling UK households may be increasingly turning to credit cards, overdrafts, and loans for support, a view reinforced by data from the ONS which indicates that the savings ratio fell to a record low in the three months to March.

Although this behaviour may boost retail expenditure in the short term, it is unlikely to be sustainable, especially in light of the current squeeze in real incomes. Indeed, when combined with rates of inflation significantly above the Bank of England’s target of 2%, this type of behaviour may help prompt an increase in interest rates in the near future.


Data from ShopperTrak indicates that footfall continued to fall sharply in May, as the number of shoppers that visited the high streets and other retailer centres declined by 3.0% in comparison with the same month last year.

All regions across the UK reported negative growth, with the severity of decline particularly acute in the East and East Midlands, which reported decreases of 10.0% and 7.1% respectively.

Across the UK as a whole, the rate of decline has accelerated to an average level of 2.5% in 2017, in comparison to 1.7% in 2016 and 1.1% in 2015; a trend which may reflect the rapidly rising share of online transactions as a proportion of total retail spending.

Property prices

Data from Nationwide indicates that the average UK house price in May was £208,711, which reflects growth of 2.1% when compared with the same month last year. House price growth has softened considerably in recent months, falling from 4.5% in February, to 3.5% in March and 2.5% in April.

Although the widely predicted collapse in house prices failed to materialise following the referendum result, leading experts at the London School of Economics still believe a severe downturn may be possible given the weakening economic outlook. Additionally, recent figures from The National Associate of Estate Agents reported that 77% of homes sold for less than their asking price in May.

Meet the Authors