It is highly possible that the sharp drop in retail sales in the first quarter over-stated the weakness of spending, while the second quarter rebound overstates the strength

By Howard Archer, Chief Economic Advisor to the EY ITEM Club:

Retail sales volumes rose 0.6% month-on-month in June after a 1.1% drop in May as they were seemingly helped by warmer weather. Warm weather had earlier been reported to have contributed to a spike in sales in April along with the later Easter.

Clothing sales were reported to have particularly benefited from the warmer weather, rising 0.4% month-on-month and 6.2% year-on-year. There was also a sharp 3.3% month-on-month rise in household goods sales.

Retail sales volumes rose 1.5% quarter-on-quarter in Q2 in contrast to a 1.4% quarter-on-quarter drop in Q1. While consumer spending on services appears to have been lacklustre in Q2, this suggests that there was some pick-up in consumer spending after a sharp slowdown in the first quarter.

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It is highly possible that the sharp drop in retail sales in Q1 over-stated the weakness of spending, while the Q2 rebound overstates the strength. The later Easter in 2017 may have been a factor.

Meanwhile, annual shop price inflation eased back to 2.7% in June from 3.2% in May, providing a little relief to consumers. Nevertheless, shop price inflation is still highly likely to have outstripped wage growth.

Outlook for consumers still difficult despite June inflation dip

The outlook for consumers looks set to be highly challenging over the second half of the year, even though a modicum of relief has come from consumer price inflation unexpectedly dipping to 2.6% in June from a near four-year high of 2.9% in May.

Real income growth is currently negative, and it looks likely to remain so through the second half. Latest ONS data shows that total real average weekly earnings decreased by 0.7% in the three months to May, which was the sharpest drop since mid-2014. Despite June's unexpected dip, inflation looks likely to be close to 3% through the second half of 2017, while earnings growth seems set to remain pretty close to 2%. Furthermore, consumer confidence is brittle and caution over making major purchases could well be reinforced by heightened economic, political and Brexit uncertainties.

There is some support for consumer sending coming from current solid employment growth; but it is questionable if this can continue in the face of weakened UK economic activity, increasing business uncertainty and concerns over the UK's economic and political outlook.

The squeeze on consumers should progressively ease in 2018 due to inflation falling back markedly (as the impact of sterling's sharp fall drops out). However, earnings growth will likely remain relatively muted and employment is essentially flat.

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