UK retail figures released today show volumes down 1.2 per cent in May pointing to increasingly squeezed consumers reining in spending.
The sharp drop was larger than the 0.8 per cent fall that was expected and contrasts with a 2.5 per cent spike in April that is being attributed to Easter and warm weather.
EY Item Club chief economic adviser Howard Archer says the drop was broad based with non-food sales down 2.3 per cent and household goods down 5.7 per cent.
“The squeeze on consumers is likely to get worse before it starts to ease,” says Archer.
Real average weekly earnings decreased by 0.4 per cent in the three months to April, data released this week showed, while inflation continues its upward trend hitting 2.9 per cent last month.
April’s spike means total volumes over the second quarter are still likely to see some growth, Archer says.
“The latest retail sales figures are a worrying sign for the strength of the UK economy,” says Nathan Sweeney, senior investment manager at Architas, adding: “This will have an impact on the next GDP figures, which have been heavily reliant on consumer credit in the past 12 months.”
Sweeney warns the weaker pound and rebound in commodity stocks that has so far been driving UK markets is now factored in and a strong rally has made valuations look expensive.
“As such we are maintaining our underweight to UK equities and increasing exposure to defensive large caps using the Fidelity Money Builder Dividend fund at the expense of cyclicals and mid-cap stocks.”
Tilney managing director Jason Hollands says the pick-up in inflation at a time of ultra-low interest rates investors should look to funds like Evenlode Income, Lindsell Train UK Equity and Liontrust Special Situations.
“The current environment lends itself to quality growth stocks with global diversified revenues, that have strong cash flow generation and business models that can deliver sustainable growth through the economic cycle.”