Plunging UK retail sales deepen concern about broader slowdown
A DRAMATIC drop in UK retail sales is raising fresh questions about the sustainability of Britain's recent growth spurt and Prime Minister Keir Starmer's plans to use it to restore controversial benefit cuts.
The volume of goods sold online and in shops dropped 2.7% in May, the Office for National Statistics said on Friday. Not only was that the sharpest decline since December 2023, it was enough to wipe out the combined gains over the previous four months of the year. Economists had expected retail sales to fall only 0.5% last month.
Gross domestic product contracted in April after expanding 0.7% in the first quarter, the fastest rate in the Group of Seven. Forecasters now expect a sharp slowdown in the second quarter as business tax increases ushered in by Chancellor of the Exchequer Rachel Reeves and the global tariffs imposed by US President Donald Trump take hold.
Friday's retail figures only deepen doubts about the domestic outlook, since the consumer sector represents around two-thirds of the British economy. The drop was driven by a 5% plunge in food sales, according to the ONS. Household good stores suffered a 2.5% tumble and clothing and footwear saw a 1.8% slump.
'Momentum is slowing due to persistent inflationary price pressures, international trade disruptions and cautious consumer sentiment,' said Rajeev Shaunak, head of the consumer sector at accountancy firm MHA.
A reluctance from shoppers to spend money has held back the economy in recent years and there were hopes that households were finally loosening their purse strings. Instead they may have merely brought forward spending, leading to the sharp pullback in May.
Consumer price data released on Wednesday showed the rate of inflation holding at 3.4% in May — well above the Bank of England's 2% target — while payroll statistics show that the economy has shed more than a quarter of a million jobs since October. Such figures have bolstered arguments that the tax-and-spending plans included in Reeves' first budget in the autumn were feeding inflation while undermining the job market.
Bank of England policymakers signaled concerns about weak growth and a softening jobs market, alongside mounting geopolitical pressures, while announcing their latest interest rate decision on Thursday. The remarks fed speculation that an economic slowdown could spur the bank's Monetary Policy Committee to continue its easing cycle after holding interest rates at 4.25% this week.
The pound briefly pared gains after data showed retail sales fell more than expected, but resumed its advance as the dollar weakened broadly. Sterling was up 0.2% to $1.3497 as of 11:12 a.m. in London. Traders priced in 47 basis points of interest-rate cuts from the BOE this year, little changed from the previous day.
Retail sales in May could also have been slightly affected by a cyber attack that brought down the online operation of Marks & Spencer Group Plc, one of the UK's favorite shops. The data may contain 'a very modest element of M&S being offline,' said Shore Capital analyst Clive Black, 'but if people really wanted M&S, they could have gone to a store, or they could have gone to a competitor.'
Black said May's dismal number was likely due to the timing of Easter and good weather that brought sales forward into April.
A slowdown would pose a massive political headache for Starmer, who came to power last year on a promise to rebuild public services without increases to broad-based levies like income tax or VAT. The government has this month announced hundreds of billions of pounds of spending on defense, health care and public infrastructure — largely funded by Reeves' taxes on business payrolls, private schools and the wealthy.
Moreover, Starmer has already cited stronger economic growth as a reason to rollback some controversial benefit cuts, such as a reduction to heating subsidies for pensioners. The Labour Party has come under pressure to reconsider such measures as voters in more economically deprieved areas increasingly move toward Trump-backing populist Nigel Farage's Reform UK.
Labour can still point to sustained wage gains and resurgent sentiment data as evidence that any slump could be short lived. On Friday, GfK's closely watched gauge showed confidence in June recovering to its highest level this year, although it remains below levels seen when Labour took power last summer.
Nevertheless, GfK Consumer Insights Director Neil Bellamy pointed to elevated inflation — including rising fuel prices due to tensions in the Middle East — as a reason for concern. Consumer confidence was 'still fragile,' he said. –BLOOMBERG
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