Retail sales up but slump in consumer confidence spells trouble ahead

UK retail sales continued their recovery for the fifth consecutive month in September, in an apparent show of rising consumer confidence. Non-food store sales finally returned to pre-pandemic levels, according to the Office for National Statistics (ONS). But consumer data collected over October hints at a likely tightening of purse strings as we head into winter, potentially curtailing this retail revival.

Overall retail volumes rose 1.5 per cent in September, with sales now up 5.5 per cent from February. Volumes rose by 17.4 per cent in the three months to September, compared with the previous quarter, which is the biggest quarterly increase on record. Grocery sales have been spurred on by reduced eating out throughout the pandemic, but a recovery in non-food store sales, which have been hammered by temporary store closures this year, was key to this lift, with total non-food stores sales at 1.7 per cent above the February rate.

Home improvements companies Kingfisher (KGF) and Topps Tiles (TPT) have helped to fuel this surge, having been beneficiaries of a DIY craze and a rise in construction activity. Conceivably, there could be be a structural shift underway as changes in household behaviour become ingrained. Of the 55 per cent of respondents to a Jefferies survey who have taken on more DIY projects since lockdown, 68 per cent said they intended to continue with their new hobby. 

But it is debatable whether the sustained improvement in the retail sector signifies wider gains in the whole economy. Rising food sales have come at the expense of eating out, as the hospitality sector feels the full force of tightening coronavirus restrictions. It is well noted that alcohol sales have risen at supermarkets. Footfall across UK retail fell 3.1 per cent last week compared with the week before, according to Springboard, as the 10pm curfew on hospitality takes effect.

Fears over the state of the economy and increasing infection rates may also be bringing down retail footfall. There appears to be an increasing gulf between retail sales momentum and consumer confidence. The GFK Consumer Confidence Barometer for October slumped six points to -31, its sharpest decline since May.

This data was collected over the first two weeks of October, concluding just as the coronavirus tiers came into effect on 14 October, and before the ending of furlough. It is therefore likely that the picture will worsen in the coming months, which could rein in non-essential retail spending. Weakening confidence appears to match up with household finance patterns, which indicate that households are using up more savings for spending as the availability of cash falls. Spending fell at a quicker rate than in September, according to IHS Markit, while a higher number of households are making use of unsecured debt, including credit cards and overdrafts.

The latest ONS retail data is encouraging, but it appears likely that the sector will feel the force of deteriorating personal finances and rising unemployment. This could finally herald the end of the surge in DIY shares and potentially sustain gains made by bargain retailers such as B&M European Value Retail (BME), another company that has thrived in the pandemic.