UK retail sales return to pre-pandemic levels

UK retail sales return to pre-pandemic levels

Retail sales volumes beat expectations to return to pre-pandemic levels in February, rising by their biggest margin in months.

Sales rose by 1.2 per cent in February, the largest monthly growth since October, after a revised 0.9 per cent increase in January, according to new figures released by the Office for National Statistics.

As cost of living pressures prompted shoppers to cut down on eating at restaurants and buy more food at home, sales in discount department stores went up by 2.4 per cent and food sales rose 0.9 per cent.

Sales volumes fell in the three months to February, compared with the previous three months, and remain 3.5 per cent lower than in February last year.

In February, city economists had predicted a 0.2 per cent rise in sales, which would have resulted in a decline of 4.7 per cent compared to the same period in 2022, according to city economists.

Since summer 2021, the volume of sales has fallen, but the value of sales has gone up as inflation remains close to its highest level in decades.

Inflation was thought to have peaked at 11.1 per cent last October, its highest level in 41 years. The headline rate fell for three consecutive months to reach 10.1 per cent at the beginning of the year before a surprise increase to 10.4 per cent in February. It is expected to have more than halved by the end of the year.

Retail sales are an early indicator of economic activity before gross domestic product GDP figures for January, which will be published next month.

The 1.3 per cent decline in retail sales recorded in December has been reversed by strong growth at the beginning of the year.

Fuel sales fell by 1.1 per cent after a 1.1 per cent rise in January, when train strikes boosted car travel.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said the outlook for retail sales has improved since the budget, when the government scrapped planned increases in both the fuel duty and energy price guarantee. In April households will see some relief when benefits, including the state pension, increase by 10.1 per cent and the National Living Wage increases by 9.7 per cent, as a result of these U-turns.

Other fiscal actions in April will impede growth in disposable incomes; the basic and higher rate thresholds for income tax will be frozen; the threshold for the additional rate of income tax will be reduced to 125,000, from 150,000, and the 67-a-month energy bill support scheme grant will be withdrawn. Ashley Webb, UK economist at Capital Economics, said that any rise in retail spending could be compensated by a fall in non-retail spending. At face value, these data add to the view that the recent resilience in activity is still holding up, but when households finances are under pressure it is possible that retail sales will just be met by a softening in non-retail spending such as restaurants she said. The full drag on activity from higher interest rates hasn't been felt, even though the worst of the falls in real household incomes are in the past.