Why Retail Sales Are Important for the UK and US Economies
Mar 21, 2022
5 min read
Retail sales are important in the UK and US because they are a closely-watched barometer of consumer spending and offer insights into a country’s economic health. On a daily basis, shoppers buy food and clothes along with a variety of other goods. Their spending habits offer signals about economic growth.
Updated statistics and trends in retail sales are released every month and retail sales reports are considered to be a leading indicator, providing insights into GDP performance.
The Office for National Statistics (ONS) researches and reports on the volume and value of retail sales figures in the UK. The statistics are compared on a monthly, quarterly and annual basis, which makes them useful for investors who follow retail stocks and want to understand the current and potential trends.
Retail stocks on the London Stock Exchange (LSE) include Marks & Spencer's, Next and WH Smiths. These and other retailers may be impacted by shopping behaviours and the wider economic climate. When jobs are abundant, income growth is strong and cash is flowing into shoppers’ pockets they are more likely to spend on retail goods. When the economy is weak and salaries are lower, consumers are probably going to reduce their spending on shopping.
UK retail sales
The UK retail sales sector accounts for around five percent of the total economy and generates close to 100 billion GBP each year. There are an estimated three million jobs in the sector, which includes food stores, department stores, clothing stores and household stores.
The UK retail sales sector has experienced major changes because of adjustments in consumer behaviour amid the impact of the coronavirus COVID-19 pandemic. In the years between 2008 and 2020, the UK was relatively slow to adopt online shopping. Things changed in 2020 when coronavirus restrictions drove online shopping sharply upwards to reach 20 percent of retail sales.
As a result, in 2020 the UK had the highest rate of online shopping when compared to European countries like Denmark, according to the ONS.
US retail sales
The US Census researches and reports on the American retail sector on a monthly, quarterly and annual basis in its Retail Trade Report.
The report covers sales of food, furniture, cars, gasoline, health and personal care and other retail items and is based on data gathered from 4,900 retailers. Retail sales are part of consumer spending which makes up approximately 70 percent of the US economy’s GDP and drives growth.
Amazon, eBay, Walmart and Costco are examples of US retailer stocks.
Which assets do retail sales reports move?
Retail sales reports can be market movers.
Given the value of consumer spending to GDP growth, financial analysts and investors study the reports for clues as to the direction of the economy and use them to make informed decisions. For this reason, assets which are correlated to the retail sector may trend during these economic news releases.
Correlated assets include the retailers from which consumers buy their goods and the currency used to purchase those goods. Without going into too much detail about the precise degree of correlation, it’s reasonable to assume that the GBP and retail assets like stocks may move if investors react to dips or rises in retail sales figures. On top of that, there may be a knock-on effect on real estate assets because retailers rent or buy premises from where they sell their goods.
Further down the line of economic effects is the state’s fiscal position which largely depends on tax revenues and sovereign bond sales. If retail sales fall, it probably means that household income is lower and the consequence is a reduction in tax revenues and a weaker fiscal position. Since governments use tax revenues to repay sovereign debt, a growing economy is the best way to ensure a state’s financial stability and sovereign bond credibility.
Retail sales and inflation
Inflation is the most important indicator linked to retail sales and overall consumer spending. Sudden surges in retail spending can mean related rises in the inflation rate. By the same token, a low level of demand in the retail sector can reflect a slump in inflation.
Monetary policy makers spend much of their time seeking a balance between the two extremes because low levels of demand in the retail sector often means weaker GDP growth. On the other hand, high prices may feed into the strength of the local currency and have a knock-on effect on exports by making them uncompetitive.
In the aftermath of the coronavirus COVID-19 pandemic there was a sudden rise in consumer spending in the UK as restrictions lifted. Inflation rose to 30-year highs as a result. This phenomenon may have a short-term effect as consumers adapt their behaviour in accordance with developments in this extraordinary situation.
Another knock-on effect to consider is how rising retail prices and inflation may influence interest-rate guidance from the Bank of England (BoE) and the Federal Reserve. If inflation begins to heat up, there’s a good chance that monetary policy makers will raise interest rates to keep inflation in check.
What can we learn from retail sales reports?
In the US, consumer spending accounts for around 70 percent of overall GDP and in the UK, it accounts for an estimated 60 percent of overall GDP. Since retail sales are a significant contributor to consumer spending, the monthly numbers can help market participants to make educated assumptions about whether GDP will rise or fall in the next quarter. We can also gain insights into the possible short-term direction of inflation and the strength of the local currency.
The key takeaway is that retail sales in the UK and US are drivers of economic growth and important in fundamental analysis.