UK retail sales to shrivel in June

Analysts had to rub their eyes last month when official figures showed UK retail sales volumes leapt in May at their fastest pace in more than two decades.

At a time when household incomes are being squeezed by rising living costs and newspaper headlines scream doom and gloom, it appeared too good to be true. It may be just that.

Economists polled by Reuters expect sales to have fallen by 2.5 per cent last month, reversing most of May's 3.5 per cent jump. And there is a strong chance earlier data may be revised down.

"It's most likely that we will get a much weaker reading this time," said Amit Kara, an economist at UBS.

"Household disposable income is falling, the savings ratio is low and companies keep saying how tough it is out there. The official figures at the moment just don't tally."

May's retail sales bonanza was at least partly fuelled by unseasonably hot weather. June may be payback time. Survey evidence has been gloomy. The British Retail Consortium said like-for-like sales fell by an annual 0.4 per cent in June, the third month in four that sales values have fallen in annual terms.

Meanwhile, a regional survey by the Bank of England on Wednesday suggested the boost to consumer spending from May's heatwave came undone.

"We continue to rely on retail surveys that have proved good indicators over the years," said David Page, an economist at Investec. "With confusion over the scale of May's surge, there is a large element of uncertainty over June's report."

Mr Page is forecasting a 2.9 per cent drop on the month, which would be the biggest fall in 29 years. Even after such a decline, annual growth still looks high compared to survey evidence, raising the risk of further falls to come.

Capital Economics argues that the credit squeeze and further house prices falls mean real consumer spending will stagnate at best over the coming year, with a big risk of a technical consumer recession - two straight quarters of falling spending.

"Following May's shockingly large rise in retail sales, June's figures are likely to look pretty awful," said Paul Dales at Capital Economics.

But what if retail sales continue to surprise to the upside?