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â V-shaped: The 25.4% snapback in UK retail sales (excluding auto fuel) between April and June is all the more impressive considering that most non-essential shops were closed across the country during April, May and the first two weeks of June. Non-essential retailers re-opened in England from 15 June onwards. UK consumers have more than fully reversed the 18.9% drop in retail sales between January and April (see chart). Sales in June were 1.7% above their January level after jumping by 13.5% mom in June. As people returned to the shops in England, in-store sales of non-food items surged by 45.4% mom, with clothing and footwear up by 70.0% mom and household goods up by 46.8%. Given the considerable risks on the horizon, however, whether the positive trend carries on in the coming months remains an open question.
â Impaired fundamentals: The massive COVID-19 recession has badly impaired the key drivers of household spending. Roughly a third of the workforce is on furlough, according to the most recent data for June, and underlying unemployment is rising, even if headline data do not yet fully show it. Reacting to the labour market slack, nominal wages are already falling sharply and real wages will decline in the months to come. Even if the current level of retail spending is sustained, supported by recent fiscal initiatives to promote spending in restaurants and the hospitality sector, other key components of consumption will likely remain soft. It does not necessarily follow from the strong recovery in purchases of everyday consumer durables, which make up the bulk of general retail, that spending on big-ticket items that often require households to take out some form of finance, such as cars and home improvements, will rebound as quickly.
â Households remain nervous: The July GfK consumer survey, published today, paints a bleak picture of household confidence. After jumping from the low of -36 in May to -27 in June, headline confidence remained unchanged in July and well below the long-term average of -9. Householdsâ economic outlook for the next year mostly moved sideways in July (-41) after recovering in June (-42) from the May low of -57. Householdsâ appetite for major purchases remained subdued at -26 in July – versus a high of 6 in February – although still well above the March low of -52.
â Do not forget Brexit: While all major economies face the threat of renewed lockdowns in the event of a major second wave of COVID-19, the UK faces additional risks linked to a likely hard exit from the single market at the end of 2020. In the ongoing negotiations, UK and EU negotiators remain deadlocked on a number of key issues, including level playing field provisions, governance and rights to fishing waters. A deal by year end is thus probably out of reach. Even in our base case of a semi-managed hard exit, where the UK and the EU agree a patchwork of temporary measures to avoid the so-called âcliff-edgeâ, the lasting negative economic consequences to the UK from leaving its biggest market without a deal will add to the heavy drag on sentiment from the continued pandemic risks.
â Possible wobbles ahead: While the jump in retail bodes well for the near-term economic outlook, a strong labour market recovery and the easing of downside risks are necessary for the progress to continue and spread to broader consumption, which makes up 70% of GDP. The damage to fundamentals, combined with serious COVID-19 and Brexit uncertainties, casts a heavy fog of uncertainty over the UK consumer outlook for H2 2020 and early 2021.
Chief Economist
+44 20 3207 7889
holger.schmieding@berenberg.com
Senior Economist
+44 20 3465 2672
kallum.pickering@berenberg.com
European Economist
+4420 3207 7859
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