UK Retail Sales Should Be Taken With a Grain of Salt, Say Economists

European Economy | Written by CEP News

Economists and analysts are taking May's results in UK retail sales with a grain of salt after the Office of National Statistics announced a 3.5% month-over-month rise in sales, up from both the 0.1% fall expected and the 0.3% decline recorded in the previous month.

April's figure was revised down from an initial decline of 0.2%.

Annual retail sales jumped 8.1%. Economists had expected an increase of 4.1% in May following April's 3.8% rise, revised down from an initial growth rate of 4.2%.

Raymond Van der Putten of BNP Paribas does not think the Bank of England will take the data very seriously. "It is unlikely that the MPC will blindly accept today's data. It tends to give greater weight to the observations by its own regional contacts," adding, "In the June Minutes, the Committee noted that the observed strength in consumer spending in Q1 is likely to be revised down once more data have become available."

The data was also sharply different from a survey conducted by the Confederation of British Industry for May which saw a reading of -14 compared to -26 in April.

"Given the backdrop of sharply rising inflation and plummeting confidence, we continue to think that the official sales figures should be taken with a pinch of salt," said Ben May of Capital Economics. "Indeed, the CBI retail sales survey and the official figures have recently diverged sharply."

Meanwhile the British Retail Consortium issued a statement saying "These official figures confirm our own findings that retail sales growth was lifted by the final arrival of warm weather in early May. As the sun came out so did shoppers, boosting sales of summer food and drink and particularly clothing which had been struggling."

The BRC's total retail sales figure for May grew 4.6% month-over-month and same store sales moved higher by 1.9%. On a three-month basis, total sales advanced by 2.1% in May, but same store sales declined 0.5%.

"However, the economic fundamentals remain weak. Much of this sales growth is the result of discounts and promotions and people are still reluctant to buy more expensive items, such as furniture and electricals," added the BRC press release on Thursday.

The data also have economists speculating on how the Bank of England will interpret the news.

"The number is surprising in two ways: 1) Surveys have been weak across the board, and 2) Fundamentals for UK consumers are weak, with inflation expectations rising. We are a bit sceptical of the strength but it does increase the risk that the Bank of England could follow the ECB and send a "warning shot" to anchor inflation expectations," according to a research note from Danske Bank. "We still believe this probability is below 50%, though, and hence are not changing our forecast of the Bank of England on hold for now, followed by rate cuts next year."

On Wednesday evening, Bank of England Governor Mervyn King said, "Growth is now slowing quite sharply," speaking at the Lord Mayor's Banquet for Bankers and Merchants in London, and commented that it is "impossible to judge now" where interest rates must go to bring inflation back to target levels.

"It is, however, also worth bearing in mind that BoE Governor King would have known this number when he gave his Mansion House speech last night," said Simon Hayes of Barclays Capital Economics. "Notwithstanding that fact, Mr King was downbeat on growth and household demand, saying that growth was 'slowing quite sharply' and that both house prices and consumer spending would weaken further in response to the squeeze in real household incomes. This suggests that he at least does not set too much store by this number as a guide to future activity."

Nevertheless, markets took the news seriously, according to a report from RBC Capital Markets. "GBP/USD rallied to a high of 1.9717 and EUR/GBP fell to just above the month's low after an extremely upbeat May UK retail sales report and as implied forward UK rates rose as much as 25bp," according to Adam Cole, head of FX strategy in London.

"While, like ourselves, the Bank will likely take this report with a pinch of salt, this release underlines the fact that the threat of an ECB-style 'fine tuning' hike will remain significant over the near term. We suspect that August represents the most likely date for just such a move (coinciding with the next Inflation Report) but the risk is now clearly slanted to those members who discussed a pre-emptive hike in June, voting for higher rates in July," he added.

By Erik Kevin Franco, efranco@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it with contributions from Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Patrick McGee, pmcgee@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, cmarkham@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca

The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.