UK retail sales surge in April, but Capital Economics remains cautious on outlook

UK retail sales volumes unexpectedly surged 1.2% month-on-month in April, significantly exceeding forecasts and marking the fourth consecutive month of growth, driven by favorable weather conditions boosting high-street footfall and outdoor purchases. While consumer confidence improved slightly, Capital Economics cautions that the warm weather boost is unlikely to be sustained, potentially leading to a slump in annual retail sales growth in May. Despite near-term uncertainty, Capital Economics forecasts real wage growth and increased consumer spending in the coming years, suggesting a cautiously optimistic outlook for the UK retail sector in the medium term.

Analysis

UK retail sales volumes exhibited an unexpected and significant uplift in April, surging 1.2% month-on-month, markedly outperforming the consensus forecast of a 0.3% rise and Capital Economics' own 0.5% prediction. This performance contributed to a fourth consecutive month of growth, a sequence not seen since 2015 excluding pandemic-related distortions, and an acceleration in the 3-month on 3-month growth rate from 1.4% to 1.8%, the most rapid since July 2021. The robust April figures were largely driven by the third warmest April on record, which stimulated high-street footfall and purchases of outdoor goods, with household goods stores and department stores reporting sales increases of 2.1% and 2.8% month-on-month respectively. Food sales also saw a notable 3.9% month-on-month increase, suggesting consumers were undeterred by prevailing food and utilities CPI inflation. While consumer confidence saw a marginal improvement from -23 in April to -20 in May, Capital Economics cautions that the weather-driven sales boost is unlikely to be sustained, anticipating a potential slowdown in annual retail sales volume growth to approximately 0.0% in May. However, looking further ahead, Capital Economics projects real wage growth to exceed 2.0% this year, with overall consumer spending growth forecast to strengthen from 0.6% in 2024 to 1.2% in 2025, and 2.0% in 2026, indicating a cautiously optimistic medium-term outlook for the UK retail sector despite near-term headwinds.

Key Decisions for Investors

• Investors should interpret the strong April UK retail sales figures with caution, recognizing the significant temporary boost from favorable weather, and anticipate a potential normalization or slowdown in May's data.
• Consider the medium-term positive trajectory for the UK retail sector, as forecasts for real wage growth exceeding 2.0% in the current year and accelerating consumer spending through 2026 suggest improving underlying fundamentals.
• Monitor upcoming inflation reports, wage growth data, and consumer confidence indicators closely to assess the sustainability of consumer purchasing power and the likelihood of the projected medium-term recovery in retail spending.