(Bloomberg) -- UK retail sales bounced back in July after summer discounts and the Euro 2024 football competition unleashed spending at department stores and sports shops.
The volume of goods sold in stores and online rose 0.5% after a revised drop of 0.9% in June, the Office for National Statistics said Friday. Economists had expected a 0.6% gain, but the decline in June was more shallow than the 1.2% previously reported.
The figures suggest a stronger start to the third quarter after spending in stores held back broader economic output in June. It also may indicate optimism that the worst of a cost-of-living squeeze is behind, with inflation back near the Bank of England’s 2% target and companies hiring at the strongest pace since November.
“The UK economy appears to be chugging along, with little sign that consumers are significantly cutting back,” said Charlie Huggins, manager of the quality shares portfolio at Wealth Club, an investment adviser. “With inflation moderating, paving the way for further interest-rate cuts, retailers can look ahead to the rest of the year with a degree of optimism.”
Investors expect the BOE will cut interest rates at least once more this year after easing them on Aug. 1 from the highest level in 16 years. Double-digit inflation that peaked in 2022 along with high borrowing costs drained money from the pockets of consumers, leaving people paying more to buy fewer goods. Retail sales volumes are still below where they were before the pandemic started in early 2020.
“Rising real incomes, as inflation falls, should mean consumer spending growth accelerates over the rest of this year,” said Alex Kerr at Capital Economics.
The pound held gains after the data and was set for its first weekly advance in more than a month, trading above $1.28. It was also up against the euro.
Market bets on BOE rate cuts are little changed after this week’s comprehensive set of UK economic data, which showed healthy economic growth in the second quarter and a surprise fall in unemployment. Swaps fully price a quarter-point cut by November and a chance of about 65% of another move in December.
“There is some relief that sales bounced back in July after weakness in June,” said Lee Hardman, a strategist at MUFG. “This report might not be a big market mover for the pound, but the currency is continuing to recover lost ground as risk sentiment improves this week.”
Prime Minister Keir Starmer has put boosting the economy at the heart of his Labour Party’s agenda after winning the July 4 election. Retailers have said they’re concerned about weakness in spending patterns.
What Bloomberg Economics Says ...
“The rebound in UK retail sales reflects a steadier outlook for economic growth. The pressure on households is easing as wage growth continues to surpass inflation, leaving more change in people’s pockets. The figures add to evidence that the UK economy will see solid growth in the third quarter.”
—Niraj Shah, European economist. Click to read the REACT.
Excluding fuel, retail sales rose 0.7%, which was stronger than the 0.6% rate economists had expected. June’s figures were hit by unusually cool weather and uncertainty about the election, which ended 14 years of Conservative Party rule.
The broader trend for retailers is looking more favorable. Sales rose 1.1% for the three months to July when compared with the quarter finishing in April. They’re up 0.8% from the same period last year. The proportion of sales made online also edged up to 27.8% from 27.4% the month before.
“There is little doubt that the UK economy is moving along nicely with virtually all indicators pointing in the right direction, with sales volumes now virtually back to pre-Covid pandemic levels,” said Neil Birrell, chief investment officer at Premier Miton Investors, a fund manager.
There was anecdotal evidence that England’s progress to the final of the Euros boosted spending on replica football shirts, televisions and alcoholic drinks, according to the ONS. It also credited warmer weather in the second half of the month, which brought people out shopping, and discounting in bigger stores.
Temperatures increased in the third week of July, reaching around 30 degrees Celsius in some areas and the upper 20s across the prosperous southeast of England, according to the Met Office.
“Following the gloomy start to summer spending, retailers welcomed the warmer July weather which gave sales growth a boost, particularly in areas such as cosmetics, clothing, footwear, and books as consumers prepared for their summer holidays,” said Kris Hamer, director of insight at the British Retail Consortium. “Computing also sold well as people upgraded their home office tech purchases.”
The official figures were stronger than surveys had indicated. The CBI had said retailers reported disappointing sales in July and that volumes are likely to stay below seasonal norms in August. The BRC said it found a 0.5% increase in sales last month, slower than the 1.5% rate a year ago but above the three-month average.
“Retailers basked in increased footfall as parents looked for ways to entertain their kids,” said Jon Boland, general manager of Clover in the UK, which sells payment systems to shops. “Discretionary spending has increased thanks to the school summer holidays.”
--With assistance from Aline Oyamada and Anchalee Worrachate.
(Updates with further market reaction and comment.)
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