The macro-economic drivers behind shopper behaviour have continued to improve over the last quarter, at least on some measures.

The provisional estimate for Q2 GDP shows that the UK economy has finally regained all the lost ground of the last five years, returning to its pre-crisis level of output. However, the jubilation should not be overly loud yet, since the population has grown over this period and thus both GDP per capita and retail sales per capita remain below their 2007 peaks.

On a more positive, front unemployment has continued to fall over the last three months. This is yet to have any impact on real average earnings growth, which remains firmly negative. As we have said numerous times in the past, the real retail recovery will not come until shoppers actually feel that their wages are rising faster than the cost of living. This makes it rather hard to explain why the GfK measure of consumer confidence moved into positivity for the first time in nine years two months ago.

Clearly the consumer is taking some comfort from the positive economic commentary in the media, and may well be hoping for a pay rise in the foreseeable future. This has fed through to retail sales volumes, which rose at their fastest pace for a decade in Q2 2014. However, June was relatively quiet, perhaps due to the World Cup which has traditionally led to a month of low sales followed by a pick-up in the following month.

We expect that consumer confidence will stay above its long-term trend over the remainder of the summer, and this bodes well for Christmas trading.

The biggest risk to this relatively positive picture is too much speculation on the prospects of an early rise in interest rates. The Governor's relatively hawkish words recently have been widely broadcast, but we believe that this is more a move to prepare us for an interest rate rise, rather than a signpost of an imminent rise. Too much noise around this topic too soon could well drive the economic positivity back down, and that in turn could lead to a weaker than expected final quarter for retailers. Base rates will and should go up, but too soon and too fast would be very damaging to consumer confidence and retail sales.

Taken from
UK Shopping Centre and High Street Bulletin Q2 2014