Retail Resilience in the British Commonwealth

We have seen dour economic takes pepper financial headlines this year, but some underappreciated transatlantic rays of optimism keep shining. Following America’s report earlier last week, August UK and Canadian retail sales also pointed positively. Whilst just one month, these figures are further evidence of economic resilience out of the developed world, in our view.

UK Retail Sales Warmed This Summer

UK retail sales volumes registered their third-straight positive month in August, climbing 0.5% m/m and doubling expectations of 0.25%.^[i] Clothing stores, butchers and bakers and non-store retailing contributed most, which some businesses attributed to good August weather.^[ii] Taking a step back, retail sales volumes were down -0.1% in the three months to August when compared to the same period through May.^[iii] Yes, that is a slight contraction, but it is also an improvement from the -0.7% in the three months to July compared to the same period through April.^[iv] From an even longer view, UK sales volumes rose 0.7% y/y.^[v] These results aren’t robust, but considering many commentators we follow presumed tariffs and April’s employer NIC hike would weigh on the UK economy, that projection has yet to manifest in data, according to our review.

On Canada’s Retail Sales’ Summertime Swings

On Canada, we will start with the bad news: July retail sales fell -0.8% m/m (both in value and volume terms), the worst start to a Q3 in three years.^[vi] Of the nine subsectors, only motor vehicle and parts dealers contributed—the eight others, led by food and beverage retailers, detracted.^[vii] Positively, however, an advance estimate revealed August retail sales rose 1.0% m/m.^[viii] Granted, this release shares only the headline number—it lacks subsector details—and is based on about 50% of surveyed companies.^[ix] The average final response rate is close to 90%, so the next, more complete estimate may differ from this early report. But when taking July’s -0.8% slip with August’s apparent solid read—and June’s even stronger 1.6% m/m growth—Canadian retail sales overall appear to have pointed positively this summer.^[x] 

Now, as with all datasets, we think UK and Canadian retail sales reveal useful information but also have shortcomings. Helpfully, Britain’s figures are all sales volumes, which account for inflation-related skew—making them an outlier amongst developed nations. Canada’s July and June figures do reflect volumes, but not the preliminary August figure. Monthly datasets are also subject to short-term volatility. The UK, for example, has long reported the weather’s effects on monthly reports—but over longer timeframes, that tends to fade, based on our research. The UK has also had issues with data integrity recently, as the Office for National Statistics’ seasonal adjustment factors overstated retail sales’ volatility.^[xi] Moreover, retail sales aren’t fully representative of consumer spending since they reflect goods purchases but not most services. Yet in both the UK and Canada, services accounts for around 60% of total spending.^[xii] And all these data are backward-looking—confirming what forward-looking markets have long since digested and moved on from, in our view.

But we think backward-looking data can still have value for investors, as these reports illustrate the economic resilience stocks pre-priced in both these nations earlier in the spring and summer.^[xiii] Our reviews of financial publications showed tariff concerns weighed on sentiment in both the UK and Canada—especially since America is the latter’s largest trading partner.^[xiv] The UK also faced questions about fallout from April’s employer NIC hike. We don’t dismiss those headwinds, but we think it is telling they haven’t caused domestic demand to shrink materially or noticeably.

Keep that in mind as commentators across the developed world argue monetary policy institutions’ rate cuts are necessary to support growth. As demographics, labour market weakness and stubbornly elevated prices weigh on moods, retail sales growth has continued trending upward—a sign things aren’t as poor as many fear, in our view.