Retail resilience challenged by higher interest rates

Retail sales shrugged off the expected drag from May’s extra bank holiday, rising for the second successive month however the EY ITEM Club is predicting that persistent inflationary pressures and rising mortgage costs mean a sustained retail renaissance is unlikely in the near-term, with sales growth set to remain slow throughout this year.

Low unemployment and rising consumer confidence mean the retail sector does still enjoy some tailwinds. But these positives will be challenged by growing financial issues for some households.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, said “Retail sales shrugged off the expected drag from May’s extra bank holiday, rising 0.3% month-on-month, the second successive monthly increase. May’s rise was driven by an increase in non-store sales (+0.4%) and fuel sales (+0.2%). The former looks to have been aided by a period of warm weather, while fuel sales appear to have benefited from some travellers switching to the road in the face of industrial action on the rail network. However, food and non-food store sales fell modestly.”

“Looking beyond any temporary supports, the retail sector does enjoy some tailwinds. The labour market is proving resilient, with unemployment remaining low while growth in cash pay is strong. Furthermore, the latest GfK barometer of consumer confidence for June rose for the fifth successive month, and spending power should receive a boost in July, when average annual household energy bills will fall by almost 20%.”

“However, the EY ITEM Club thinks the retail recovery will struggle to gain momentum. Although today’s retail release showed growth in shop prices slowing to a 16-month low, overall inflation is proving uncomfortably sticky, suggesting that it will take longer for real household incomes to return to growth. Relatedly, the Bank of England raised interest rates by more than expected yesterday, and the rate rise cycle may have further to run. This will add to the debt service costs of the 2.5mn households exposed to higher mortgage rates during 2023.”