Optimism seems to abound about British retail, but talk of a sustained recovery may be premature.

Optimism seems to abound about British retail, but talk of a sustained recovery may be premature.

A number of indicators have come together to drive optimism about the UK retail sector over the last few weeks.

Today the British Chambers of Commerce (BCC) upgraded its outlook for growth in 2014 from 2.8% to 3.1%, also raising expectations for growth next year.

This followed news from the Confederation of British Industry (CBI) that growth among726 companies polled was at its best level since 2003, signalling a potentially strong year ahead.

The balance of sentiment among retailers from the CBI survey was slightly down on April and also undershot wider expectations, but expectations for June were strong, hinting that a broader recovery in sales might be underway.

Turning a corner?

From a retail perspective this is welcome and taps into a much wider sense that recovering incomes, rising house prices and falling unemployment will bolster consumer sentiment and drive up household spending.

This sentiment appears to be finally bringing direct benefits to retailers. Earlier this month the Local Data Company reported a decline in shop vacancies to 13.5% in April – the lowest level since 2010. Springboard has also reported declining vacancy rates in town centres, down to 10.6% from 11% at the beginning of the year.

Looking at retail sales in aggregate a corner does appear to have been turned. 2013 brought the first rise in retail sales volumes in the UK since 2008.

The rise, in real terms, was modest at just 1% but higher expectations mean we expect 2014 retail sales volumes to rise more strongly, by 2.8%. In value terms that amounts to growth of 4.6%.

Rising house prices have driven a wealth effect in the UK with sales of household goods enjoying particular benefits. B&Q has reported like for like sales growth of nearly 10% in the first quarter of 2014, and parent company Kingfisher managed a 20% rise in profits.

Even more noteworthy is that market expectations were even higher, hinting that investors are also becoming much more bullish about the retail environment.

A note of caution

Despite the burgeoning sense of optimism, recovery in British retail still rests on fragile foundations. Even as Springboard reported a decline in store vacancies, it also reported a slight decline in footfall for April.

Meanwhile the CBI tempered its own optimism by pointing to the need for rebalancing in the economy away from credit-fuelled spending.

House prices and rising consumer credit are key contributing factors to recent growth, which is bringing respite to some retailers but not to others. The rising market share of hard discounters such as Aldi and Lidl at the expense of mainstream retail highlights a continued sense of austerity and price-sensitivity among shoppers.

Meanwhile the ongoing shift towards online and convenience retail channels has also undermined the big-box, high capital investment stores that have grown up over the last two decades.

Mid-market retailers, particularly Tesco and Morrisons, continue to struggle to come to terms with a changing retail landscape. Even Sainsbury’s, which maintained sales growth during the darkest days of the last decade, has experienced declines. A potentially damaging price war looms large as mid-market retailers seek to redress the balance.

Growth at what expense?

Economic fundamentals highlight the fragility of a retail recovery. Inflation has been held back by an unwillingness to accommodate price rises and will continue to undershoot the Bank of England target of 2% this year.

Of greater concern is the continued failure of wage inflation to keep up with sales growth or inflation. In real terms wages fell by 1.3% in 2013 and are expected to rise by just 0.4% in 2014, a much lower rate than real private consumption, which will rise by 3%.

This means that the bounce-back experienced in 2014 is unlikely to be sustained into the medium term.

Retail sales will continue to rise from 2015, but at a much lower rate than this year as consumers seek to bridge the gap between income and expenditure growth.

The good news is that sales are no longer expected to shrink and, after four consecutive years of decline from 2008 to 2012, British retailers may feel that they’ve earned their day in the sun.

  • Jon Copestake is chief retail analyst at the Economist Intelligence Unit