Tag: retail sales

Posted on

Getting real with retail sales

In the third of our series on the distinction between nominal and real values we show its importance when analysing retail sales data. In the UK, such data are available from the Office for National Statistics. This blog revisits an earlier one, Nominal and real retail sales figures: interpreting the data, written in October 2023. We find that inflation-adjusted retail sales data reveal some stark patterns in the sector. They help contextualise some of the challenges faced by high streets up and down the UK.

The Retail Sales Index

Retail sales relate to spending on items such as food, clothing, footwear and household goods. They involve sales by retailers directly to final consumers, whether in store or online. Spending on services such as holidays, air fares and train tickets, insurance, banking, hotels and restaurants are not included, as are sales of motor vehicles. The Retail Sales Index for Great Britain is based on a monthly survey of around 5000 retailers across England, Scotland and Wales and is thought to capture around three-quarters of turnover in the retail industry.

Estimates of retail sales are published in index form. There are two indices published by the ONS: a value and volume measure. The value index reflects the total turnover of business, while the volume index adjusts the value index for price changes. Hence, the value estimates are nominal, while the volume estimates are real. The key point here is that the nominal estimates reflect both price and volume changes, whereas the real estimates adjust for price movements to capture only volume changes.

The headline ONS figures for May 2024 showed a rise by 2.9 per cent in the volume of retail sales, following a 1.8 per cent fall in April. In value terms, May saw a 3.3 per cent rise in retail sales following a 2.3 fall in March. Monthly changes can be quite volatile, even after seasonal adjustment, and sensitive to peculiar factors. For example, the poor weather in April 2024 helped to depress retail spending. It is, therefore, sensible to take a longer-term view when looking for clearer patterns in spending behaviour.

Growth of retail sales

Chart 1 plots the monthly value and volume of retail sales in Great Britain since 1996. (Click here to download a PowerPoint of the chart). In value terms, monthly spending in the retail sector has increased by 169 per cent since January 1996, whereas in volume terms, spending has increased by 77 per cent. Another way of thinking about this is in terms of the average annual rate of increase. This shows that the value of spending has risen at an annual rate of 3.5 per cent while the volume of spending has risen at an annual rate of 2.0 per cent. This difference is to be expected in the presence of rising prices, since nominal growth, as we have just noted, reflects both price and volume changes.

Chart 1 helps to identify two periods where the volume of retail spending ceased to grow. The first of these is following the global financial crisis of the late 2000s. The period from 2008 to 2013 saw the volume of retail sales stagnate and flatline, with a recovery in volumes only really starting to take hold in 2014. Yet in nominal terms retail sales grew by around 14 per cent.

The second of the two periods is from 2021. Chart 2 helps to demonstrates the extent of the struggles of the retail sector in this period. It shows a significant divergence between the volume and value of retail sales. Indeed, between April 2021 and October 2023, while the value of retail sales increased by 8.0 per cent the volume of retail sales fell by 11.0 per cent.

The recent value-volume divergence reflects the inflation shock that began to emerge in 2021. This saw consumer prices, as measured by the Consumer Prices Index (CPI), rise across 2022 and 2023 by 9.1 per cent and 7.3 per cent respectively, with the annual rate of CPI inflation hitting 11.1 per cent in October 2022. Hence, while inflation was a drag on the volume of spending it nonetheless meant that the value of spending continued to rise. Once more this demonstrates why understanding the distinction between nominal and real is important. (Click here to download a PowerPoint of the chart).

To illustrate the longer-term trend in the volume of retail spending alongside its volatility, Chart 3 plots yearly retail sales volumes and also their percentage change on the previous year.

The chart nicely captures the prolonged halt to retail sales growth following the global financial crisis, the fluctuations caused by COVID and then the sharp falls in the volume of retail spending in 2022 and 2023 as the effects of the inflationary shock on peoples’ finances bit sharply. This cost-of-living crisis significantly affected many people’s disposable income. (Click here to download a PowerPoint of the chart).

Categories of retail sales

We conclude by considering categories of retail spending. Chart 4 shows volumes of retail sales by four broad categories since 1996. (Click here to download a PowerPoint of the chart). These are food stores, predominantly non-food stores, non-store retail and automotive fuel (i.e. sales of petrol and diesel “at the pumps”).

Whilst all categories have seen an increase in their spending volumes over the period as a whole, there are stark differences in this rate of growth. Perhaps not surprisingly, the most rapid growth is in non-store retail. This includes online retailing, as well as market stalls and catalogues.

The volume of retail spending in the non-store sector has grown at an average annual rate over this period of 6.3 per cent, compared with 2.6 per cent for non-food stores, 1.2 per cent for predominantly food stores and 1.0 per cent for automotive fuels. The growth of non-store retail has been even more rapid since 2010, when the average annual rate of growth in the volume of purchases has been 10.2 per cent, compared to 1.8 per cent for non-food stores, 1.0 per cent for automotive fuels and zero growth for food stores.

If we focus on the most recent patterns in the categories of retail sales, we see that the monthly volume of spending in all categories except non-store retail is now lower than the average in 2019. Specifically, when compared to 2019 levels, the volume of spending in non-food stores in May 2024 was 2.6 per cent lower, while that in food stores was 4.4 per cent lower, and the volume of spending on automotive fuels was 10.8 per cent lower. In contrast, spending in non-store retail was 21.2 per cent higher. Yet this is not to imply that this sector has been immune to the pressures faced by their high-street counterparts. Although it is difficult to disentangle fully the effects of the pandemic and lockdowns on non-store retail sales data, the downward trajectory in the volume of retail sales in the sector that occurred as the economy ‘reopened’ in 2021 and 2022 continued into 2023 when purchases fell by 3.5 per cent.

Final thoughts

The retail sector is an incredibly important part of the economy. A recent research briefing from the House of Commons Library reports that there were 2.7 million jobs in the UK retail sector in 2022, equivalent to 8.6 per cent of the country’s jobs with 314 040 retail businesses as of January 2023. Yet the importance of the retail sector cannot be captured by these statistics alone. Some would argue that the very fabric and wellbeing of our towns and cities is affected by the wellbeing of the sector and, importantly, by structural changes that affect how people interact with retail.

Articles

Research Briefing

Statistical bulletin

Data

Questions

  1. Which of the following is/are not counted in the UK retail sales data: (i) purchase of furniture from a department store; (ii) weekly grocery shop online; (iii) a stay at a hotel on holiday; (iv) a meal at your favourite café or restaurant?
  2. Why does an increase in the value of retail sales not necessarily mean that their volume has increased?
  3. In the presence of deflation, which will be higher: nominal or real growth rates?
  4. Discuss the factors that could explain the patterns in the volume of spending observed in the different categories of retail sales in Chart 4.
  5. Discuss what types of retail products might be more or less sensitive to changes in the macroeconomic environment.
  6. Conduct a survey of recent media reports to prepare a briefing discussing examples of retailers who have struggled or thrived in the recent economic environment.
  7. What do you understand by the concepts of ‘consumer confidence’ and ‘economic uncertainty’? How might these affect the volume of retail spending?
  8. Discuss the proposition that the retail sales data cast doubt on whether people are ‘forward-looking consumption smoothers’.
Posted on

Temperature down; spending up

With the winter fast approaching, consumers have already begun to stock up on warmer clothes. This has contributed towards consumer spending increasing faster in September than it has in the past 3 years. According to Visa Europe’s UK expenditure index, sales in August increased by 1.2pc, but in September they rose month-on-month by 3pc.

But whilst sales on the high-street increased, sales on-line and over the telephone declined. It seems that the recent decrease in temperature is just what the retail sector ordered, as people took to the high streets.

Furthermore, recent improvements in consumer income, together with lower inflation and rising employment have all contributed towards a growth in spending. However, as consumer confidence remains at a relatively low level, it is unlikely that the winter will bring much of a change to growth in the economy. The Chief Economist at Markit said:

However, consumer confidence remains historically low as uncertainty about the economy and job security persists, suggesting that the bounce in spending seen in the third quarter could be as good as it gets for the foreseeable future.

Although the lower temperature has caused a boost in consumption, once people have made their ‘investment’ in warmer clothes, retail spending may once again decline. Hence the above comment by Markit, which suggests that further sustained increases in consumer spending may still be some way off.

The following few articles look at the latest data on retail spending.

UK consumer spending ‘rose in September’ BBC News (5/10/12)
Consumer spending increases by 3pc The Telegraph (5/10/12)
Consumer spending increases by 3% The Press Association (5/10/12)
UK retail sales: what the analysts say Guardian (20/9/12)
Online sales and wet weather boost John Lewis Scotsman, Peter Ranscombe (5/10/12)

Questions

  1. Which factors typically affect consumer spending?
  2. Using a diagram, illustrate the impact of this increase in consumption on national output and the price level.
  3. Is it possible that a multiplier effect may occur with the August and September rise in retail sales?
  4. Why is consumer confidence remaining low? Which components of aggregate demand does it affect?
  5. Explain why (a) lower inflation, (b) the colder weather and (c) rising employment have caused consumer spending to rise.
Posted on

‘Sale’ing to the future

With all the doom and gloom of recent economic data, including rising inflation and higher unemployment, there’s finally a small speck of light and that’s in the form UK retail sales. The latest data from the ONS suggests that sales in the UK in September were higher than previously forecast and reversed the 0.4% decline we saw in August. A big contributing factor to this positive data was a boost to online sales, but this small glimmer of hope is unlikely to be sufficient to keep the economy going – unless sales keep rising, we are unlikely to see any significant increase in economic growth.

The data, while positive, is still unlikely to have any impact on economic policy. The minutes from the Monetary Policy Committee showed that there was unanimous support for further quantitative easing, as the threat of weak growth and financial instability and uncertainty remains. An economist from Barclays Capital said:

‘We don’t think the recent strong growth in monthly sales is likely to be sustained…The environment for retailers is likely to remain challenging as consumer spending remains depressed driven by low confidence and slow earnings growth.’

The data from September is positive, but it does little to offset the decline in sales seen in August. It was revised down from 0.2% to 0.4% – some blame the hot weather, which discouraged consumers from hitting the high streets in preparation for the winter. The key data to look out for will be sales figures for the next few months. Only then will we have more of an indication about exactly which direction the economy is moving in. The following articles consider this latest economic data.

Retail sales in UK unexpectedly increase at fastest pace in five months Bloomberg, Scott Hamilton (20/10/11)
UK retail sales see stronger-than-expected rise BBC News (20/10/11)
Nothing expected from today’s UK retail sales figure FX-MM, Richard Driver (20/10/11)
Retail sales: what the economists say Guardian (20/10/11)
£1 in every £10 now spent online, says ONS Telegraph, Harry Wallop (20/10/11)
Retail sales rise more than expected Financial Times, Sarah O’Connor (20/10/11)
Retail sales up but good weather has a price Sky News (20/10/11)

Questions

  1. Which factors have contributed to the higher than expected sales figures for September?
  2. Why do economists not believe that the higher growth in sales means signs of recovery for the UK economy?
  3. How has higher inflation impacted UK households?
  4. To what extent do you think the warm weather held back retail sales?
  5. What could explain why there has been a significant growth in online sales?