Retail sales are rising in the warmest May on record, while consumer confidence is cautiously improving

Retailers benefited from the warmest May in at least 140 years last month as shoppers splurged on clothes, shoes and furniture.

Retail sales recovered from a wet weather-induced drop of 1.8 percent in April to a rise of 2.9 percent in May, beating forecasts of a 1.5 percent increase, data from the Office for National Statistics.

The increase was driven by online sales growth of 5.9 percent, reflecting the largest monthly increase since April 2022, while sales of clothing and home goods increased by 5.4 and 3.5 percent respectively.

While the warm weather played a role, clothing and shoe stores, furniture stores and sporting goods, games and toy stores also cited the impact of promotions as a source of strength.

Sophie Lund-Yates, chief equity analyst at Hargreaves Lansdown, said: ‘This suggests consumers are behaving with cautious optimism, which is good news for businesses.

“The real test will come once promotional activity tapers off, which for many is necessary for the sake of margins, and how willing customers are to continue spending once that Band-Aid comes off.”

Retail sales growth was broad-based

Separate data this week shows British consumers are finding their feet as the broader economic picture improves, with headline inflation finally back to the 2 percent target.

The GfK consumer confidence index jumped to a value of -14 in June, reaching its highest level since November 2021 and marking the third consecutive month of improvement.

Silvia Rindone, head of retail at EY in Britain and Ireland, said: ‘While macroeconomic indicators including interest rates, inflation and wages are improving, it appears consumers are biding their time and waiting for a more optimistic environment before they loosen their wallets.

‘As we enter the second half of 2024, there is a feeling that the tide may be turning. A summer full of high-profile sporting events such as UEFA Euro 2024 and the Paris Olympics, combined with better weather and the possibility of political change, could be the catalyst for a revival in consumer confidence.’

Retail sales volumes remain below pre-Covid-19 levels

Thomas Pugh, economist at RSM UK, predicts that retail sales will “continue to gradually improve from here” as the impact of easing inflation takes hold.

He said: Households’ real disposable incomes will rise rapidly as inflation returns to 2 percent, tax cuts kick in and the big increase in the minimum wage hits people’s pockets. This will boost overall consumer spending and retail sales.

‘Second, inflation is particularly weak in retail sales. The price of retail goods rose just 1.2 percent annually in May, the slowest increase since early 2021. This means that continued strong nominal spending will increasingly be reflected in sales volumes.

“Third, retail sales volumes are still about 2 percent below pre-pandemic levels.

“This is partly a hangover after the huge spending on goods during the pandemic. But after two years of reduced spending on retail goods, households will have to start replacing some of the things they bought during the pandemic.

‘Additionally, as the housing market begins to recover and the number of transactions increases, this will stimulate demand for household goods.’