Economic conditions for the current period are best described as stable to slightly negative. While the economy re-entering recession is inevitably bad news, the decrease in economic activity was only slight.
Other indicators are showing more positive signs. Unemployment has decreased slightly, inflation continues to ease and the first quarter of the year saw a strong uplift in housing transactions.
The above noted, it is important to recognise that the economy remains in a vulnerable position. Unemployment falls are mostly due to a flexible labour market and within some regions, notably the North East, and within some segments, notably the under 24s, rates remain stubbornly high. Meanwhile, the uplift in housing transactions is mainly a one-off driven by changes to stamp duty.
As such, our view is that economic circumstances will deteriorate slightly across the remainder of this year.
Although the economic backdrop is broadly stable consumers are faring relatively badly as their incomes and savings are squeezed and they curtail spending on the back of real, and sometimes imagined, future economic threats.
One of the biggest challenges on the consumer front is the on-going erosion in household disposable income. This was already weak coming out of the first recession but despite falling inflation, very modest increases in salaries means large numbers of households are still finding it difficult to make ends meet.
To a degree this explains the low levels of confidence: consumers feel vulnerable to negative changes in the economy as they have little room for manoeuvre on the finance front.
Given the uncertain outlook being created by the crisis in the Eurozone and other economic woes, many consumers now say they will start to moderate their spending activity.
The latest May retail numbers are deceptively rosy driven, in large part, by the better weather, with garden centres, summer clothing, and seasonal food items all beneficiaries. A pre-Jubilee boost at the end of May, when footfall rose strongly, have also contributed to the uplift.
While the figures do represent a materially better performance, for the sake of balance it is important to place them in a wider context. Much of May’s uplift can be attributed to latent demand from April, which saw suppressed sales of spring and summer stock, especially in clothing. As such, it is unlikely that May represents a sustainable resurgence of consumer spending; indeed, May’s numbers do not completely reverse the weakness of April.
It is also the case that May last year was rather weak following the strong royal wedding boosted April: retail sales in May 2011 were down 2.1% LFL and down 0.3% in total. These soft comparatives do, of course, flatter the current year’s numbers
As such, we see this uplift as an exception rather than a sustainable trend.