Rolling coverage of the latest economic and financial news, as retail sales across Britain drop in May and consumer morale continues to slide

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

UK consumer confidence has fallen to its lowest level since records began nearly 50 years ago, as the cost of living crisis hits households, and a summer of strike action looms.

Research company GfK’s monthly survey of Consumer Confidence Index has hit a new record low this month, dropping one point to -41 in June.

There was a particularly sharp drop in people’s personal financial expectations, as inflation squeezed incomes.

Measures of changes in personal finances over the last year, and of general economic situation over the last year and the next year all dropped.

Joe Staton, Client Strategy Director, GfK says Britain faces a stark new economic reality, and people are reacting accordingly:

With prices rising faster than wages, and the prospect of strikes and spiralling inflation causing a summer of discontent, many will be surprised that the index has not dropped further. The consumer mood is currently darker than in the early stages of the Covid pandemic, the result of the 2016 Brexit referendum, and even the shock of the 2008 global financial crisis, and now there’s talk of a looming recession.

One thing is for sure, Britain faces a stark new economic reality and history shows that consumers will not hesitate to retrench and tighten their purse strings when the going gets tough.”

Britain’s bosses are gloomier too.

Flash estimates of the economy’s performance in June, released yesterday, showed business optimism at its lowest since the early months of the Covid pandemic in the spring of 2020 and the sharpest drop in new order volumes for a year.

Later today we’ll find out how optimism is holding up (or not) among German investors, and US consumers, as fears that major economies could be tipped into recession grow.

Ongoing supply chain problems are also hitting retailers, says Matt Jochim, partner at McKinsey & Company, and industrial action could add to the load.

“Shopping behaviour is changing as inflation takes its toll on spending. Food, household goods and furniture sales volumes reduced as consumers held back on big ticket purchases.

“Supply chain disruptions remain a factor, as retailers and consumer goods manufacturers continue to navigate lead time uncertainty and associated cost pressures like driver wage increases and container freight costs.

“Retailers will find navigating the summer months a continued challenge, as they contend with holiday plans and rail strikes.

Britons are spending less on food as rising prices force them to cut back on their weekly supermarket shop, our economics editor Larry Elliott writes.

The Office for National Statistics (ONS) said smaller grocery bills were the main factor behind a 0.5% drop in retail sales in Great Britain last month.

However, department stores and household goods outlets also reported a reluctance of consumers to spend as a result of a higher cost of living.

The UK’s statistics agency said the decrease in the volume of food sales appeared to be linked to inflation, which as measured by the consumer prices index hit a 40-year-high of 9.1% in May.

Retail sales growth in April was also revised down from an original estimate of 1.4% to 0.4%, while in the three months to May – a better guide to the underlying trend than a single month’s figures – spending was down by 1.3% on the previous quarter.

Here’s the full story:

UK retail sales (excluding fuel) are down by roughly 4% since last October, reports James Smith, economist at ING.

That tumble is due to the cost of living squeeze and a more general rotation from goods to services spending as the Covid-19 lockdowns have been eased, he says.

Smith predicts there will be further weakness ahead (although the ‘solid’ jobs market should provide support).

The cost of living squeeze is likely to cause a further hit to demand over the coming months.

Confidence fell to another all-time low in June, despite new government support measures. The near-10% rise in petrol/diesel prices over the past month has dealt another blow to finances.

UK retail sales (excluding fuel) are down by roughly 4% since last October, which reflects both the cost of living squeeze and a more general rotation from goods to services spending post-Covid. Expect further weakness ahead, says @SmithEconomicshttps://t.co/4veBwEUStp pic.twitter.com/p31p7rqJdw

He’s also produced this neat chart of today’s consumer confidence report, showing how people are pessimistic about the financial outlook, and very reluctant to make major purchases:

May’s drop in retail sales follows a “triple whammy” of rising energy prices, spiralling food prices and a hike in National Insurance in April.

Maxim Syn, head of desk at global financial services firm Ebury, said these all dampened demand.

Household budgets were also squeezed from all directions as the weakening pound and global inflationary pressures create further headwinds for the economy.

“Food prices in particular have seen big increases with Wednesday’s inflation figures showing food was the biggest contributor with bread, cereals and meat seeing the largest upticks.

This is down to rising wholesale food prices and the cost of raw materials.

The cost of living crisis bit harder last month, says Nicholas Farr, assistant economist at Capital Economics:

The 0.5% m/m drop in retail sales volumes in May (consensus -0.7% m/m) was the third decline in four months, follows a downwardly revised rise in April and suggests that the fall in real incomes from higher inflation is starting to hit consumer spending harder.

More pain probably lies in store for the retail sector over the coming months, but that won’t stop the Bank of England from raising interest rates further.

On an annual basis, retail sales volumes shrank by 4.7% compared with May 2021.

But the amount spent jumped by 5% year-on-year, which underlines how inflation is taking a bite out of incomes.

Ralph Robinson, Head of Retail at technology consultancy BJSS, says retailers could face a tough summer as customers set stricter spending limits.

“It’s unsurprising that consumer confidence is so low; amidst a further rise in inflation, poor performance of the FTSE, supply chain uncertainty and a looming recession, it seems retailers are struggling to elicit anything other than unavoidable spending, such as on food, with holiday fashion the only notable exception. For me, ASDA’s chairman Stuart Rose sums up current consumer sentiment best - sharing how shoppers are now setting £30 spending limits at the tills, down further still from the £40 limits cited by Tesco’s chairman John Allan just a month ago.

“Sadly, whilst retailers will be looking hopefully to a bumper set of results next month, there is little sign of a turnaround, as retailers face the added pressure on supply chains, driven by Covid pressures in China, rail strikes in the Uk and the ongoing Ukraine conflict, coupled with reduced footfall on the highstreet. Whilst we would hope for an uplift, with inflation showing no sign of reducing, retailers will likely be concerned that this trend might continue throughout the entire summer season.”

Households reined in spending as the cost-of-living crunch continued to squeeze consumer demand, says Helen Dickinson, chief executive of the British Retail Consortium:

Many customers are buying down, particularly with food, choosing value range items where they might previously have bought premium goods. High value items, such as furniture and white goods, were also impacted as shoppers reconsidered major purchases during this difficult time.

Higher operational and input costs have pushed up prices, meaning retailers and their customers both face “hard times ahead”, Dickinson adds:

Feedback from supermarkets suggested customers were spending less on their food shop, because of the rising cost of living, says Heather Bovill, ONS deputy director for surveys and economic indicators.

Here’s her analysis of today’s retail sales report:

Commenting on today’s retail sales figures for May, Heather Bovill said: (1/4) ⬇️ pic.twitter.com/H62PqbG6Y0

Heather Bovill added: (2/4) ⬇ pic.twitter.com/txpB2hDxrk

Heather Bovill continued: (3/4) ⬇ pic.twitter.com/D8F3Na9IMo

Heather Bovill concluded: (4/4) ⬇ pic.twitter.com/snFoUOaJ4Z

Clothes shops had a busier May, with clothing sales up 2.2% in the month.

But consumers cut back on household goods, where sales fell 2.3%, and department stores where volumes dropped 1.1%.

Automotive fuel sales volumes rose by 1.1% in May.

That may be due to an increase in hybrid working and a fall in those working exclusively from home, the ONS says.

Retail sales fell in May as the rising cost of living hits household budgets, forcing people to cut back on food shopping.

Retail sales volumes across Great Britain fell by 0.5% in May from April, or by 0.7% if motor fuel is excluded, figures just released show.

The fall in sales volumes was driven by less spending at food stores, which fell by 1.6% month-on-month.

Reduced spending in food stores seems to be linked to the impact of rising food prices and the cost of living, the Office for National Statistics says.

Retail sales volumes fell by 0.5% in May, with the biggest driver coming from food store sales which fell by 1.6% https://t.co/Efid7bWkBJ Retail remains 2.6% above its pre-pandemic level. pic.twitter.com/78FQaGs4Oj

But... shoppers had to spend more to get less. The value of retail sales rose by 0.2% month-on-month, and by 0.6% once you add in fuel (which hit record high prices).

Inflation hit 9.1% in May, the highest in 40 years, which intensified the wage squeeze.

In the three months to May 2022, sales volumes fell by 1.3% when compared with the previous three months. This “continues the downward trend since summer 2021”, the ONS says.

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

UK consumer confidence has fallen to its lowest level since records began nearly 50 years ago, as the cost of living crisis hits households, and a summer of strike action looms.

Research company GfK’s monthly survey of Consumer Confidence Index has hit a new record low this month, dropping one point to -41 in June.

There was a particularly sharp drop in people’s personal financial expectations, as inflation squeezed incomes.

Measures of changes in personal finances over the last year, and of general economic situation over the last year and the next year all dropped.

Joe Staton, Client Strategy Director, GfK says Britain faces a stark new economic reality, and people are reacting accordingly:

With prices rising faster than wages, and the prospect of strikes and spiralling inflation causing a summer of discontent, many will be surprised that the index has not dropped further. The consumer mood is currently darker than in the early stages of the Covid pandemic, the result of the 2016 Brexit referendum, and even the shock of the 2008 global financial crisis, and now there’s talk of a looming recession.

One thing is for sure, Britain faces a stark new economic reality and history shows that consumers will not hesitate to retrench and tighten their purse strings when the going gets tough.”

Britain’s bosses are gloomier too.

Flash estimates of the economy’s performance in June, released yesterday, showed business optimism at its lowest since the early months of the Covid pandemic in the spring of 2020 and the sharpest drop in new order volumes for a year.

Later today we’ll find out how optimism is holding up (or not) among German investors, and US consumers, as fears that major economies could be tipped into recession grow.