UK retail sales fell 0.5% in July, weighing modestly on Pound Sterling, although economists say the underlying spending trend remains firm.
The Pound to Dollar (GBP/USD) exchange rate edged lower on Friday morning as a predictable July pullback in UK retail spending took some shine off an otherwise resilient consumer story.
GBP/USD traded around 1.3637 shortly after the data, while the Pound to Euro (GBP/EUR) rate eased to 1.1665. Sterling losses were more pronounced against the Australian and Canadian Dollars.
Retail sales volumes including fuel fell 0.5% month-on-month in July, reversing part of June’s 0.7% increase and matching the consensus forecast.
The softer detail came from underlying sales. Excluding fuel, volumes dropped 0.9%, worse than the 0.5% decline expected, while June’s increase was revised down to 0.9%.
Lloyds described the release as “disappointing”, noting that revisions and an unfavourable base effect pushed annual retail growth down to 1.6% from 3.8%.
Still, this hardly looks like consumers pulling up the drawbridge.
UK economists at Pantheon Macroeconomics said: “Retail sales predictably correct the early summer surge, the trend is still solidly up.”
Its calculations show sales growth averaging around 2.6% annualised so far this year. Earlier promotions had pulled clothing purchases forward into May and June, while repeated heatwaves appear to have distorted spending elsewhere.
There was even a rather mundane supply problem: shoppers had already stocked up on fans, while department stores reported difficulty keeping portable air conditioners available.
The British Pound softened across most major crosses after the retail-sales release, although the reaction remained modest rather than suggesting a major reassessment of the UK outlook.
UK economists at Lloyds were similarly reluctant to read too much into one weak month.
“Given the broader resilience of retail spending of late, and the weather/events of July it’s hard to take too gloomy a take on this batch of data,” the bank said.
Pantheon also suspects overall consumer spending held up better than the retail numbers imply, with hospitality benefiting from hot weather and England’s World Cup run.
UK Consumer Outlook: Confidence Jumps, Inflation Still Looms
There was better news from consumer confidence.
The GfK index rose to -14 in August from -17, its strongest reading in two years and comfortably ahead of the -18 consensus.
Pantheon thinks the improvement may prove temporary, however, describing it as a possible “Burnham bounce” driven disproportionately by improving confidence among under-50s.
Taken literally, the survey still points to healthy spending. The major-purchases balance is consistent with roughly 2.5% year-on-year retail growth, while confidence among younger consumers would imply something closer to 4%.
Inflation is the more obvious restraint later this year. Pantheon expects price growth to reach the mid-3% area, squeezing real incomes, although households may offset some of that hit by allowing savings rates to fall.
Friday’s public-finance numbers added little drama. Borrowing reached £1.8bn in July, above the £0.0bn consensus, but cumulative borrowing of £56.7bn is only £2.3bn above the OBR profile after favourable revisions to June.
For Pound Sterling, the UK retail sales miss is therefore a mild negative rather than a change of direction.
The July numbers were soft. The consumer trend, for now, still looks considerably better.
