The Overlooked Lesson From the UK’s November Retail Sales

In one of the UK’s last major economic data releases of the year, retail sales grew for a second straight month, rising 1.4% m/m in November.^[i] Some headlines touched on the report’s positive takeaways, but many worried the good cheer may be short-lived due to Omicron and the UK government’s latest containment measures. That fear gained momentum this week after the Confederation of British Industry’s (CBI) latest survey suggested December retail sales growth eased. While it is possible the government’s response to Omicron chills retail activity in the near term, we think investors benefit from keeping retail sales’ longer-term trend in mind—especially as speculation swirls about renewed COVID restrictions and a potential UK return to lockdown.

November retail sales volumes, which strip out inflation’s impact, were generally growthy. Though food stores sales volumes dipped mildly (-0.2% m/m), non-food stores sales (2.0% m/m) and automotive fuel sales (3.7% m/m) rose.^[ii] Many retailers attributed strong activity to Black Friday, which the UK imported a few years back, and holiday shopping in general. This year’s November reporting period included Black Friday but not Cyber Monday, though the ONS has accounted for this particular holiday-spending skew in its seasonal adjustment calculation since 2013. While some coverage focused on a few positive, November-specific tidbits—e.g., clothing stores sales passed their pre-pandemic levels for the first time—we think the more interesting takeaway is UK retail sales’ broad-based improvement since the start of the pandemic, despite early-2020’s deep contraction and multiple lockdowns. In our view, it is confirmation of what stocks were looking ahead to as they recovered from last year’s bear market.

Consider: UK Prime Minister Boris Johnson announced the first UK lockdown on March 23, 2020. Correspondingly, retail sales fell -5.6% m/m in March and plunged -17.7% m/m in April (and -22.4% cumulatively from February – April).^[iii] Once the government started easing lockdown measures about seven weeks later, retail sales also began recovering, rising 12.6% m/m in May and 14.0% m/m in June.^[iv] Taking a longer view, despite restrictions and partial lockdowns’ returning in late-2020 and lingering into the spring and summer, November retail sales volumes were 7.2% higher than February 2020, the last month of pre-pandemic data.^[v] Moreover, sales volumes at food stores and non-food stores are up 3.2% and 6.7%, respectively, over that same timeframe while fuel sales volumes are just -1.9% off pre-COVID levels.^[vi]

Now, retail sales aren’t all-telling—they don’t even reflect all consumer spending. But we think their post-lockdown recovery provides a sense of what forward-looking stocks were anticipating in late March 2020. The global bear market began February 12, 2020 and ended the same day Johnson announced the UK’s lockdown, which was the last among major developed nations.^[vii] In our view, stocks’ record-fast descent reflected their pricing in the damage from the global economy’s sudden shutdown. But after digesting that fallout, stocks moved on and began pre-pricing the recovery as they looked ahead to reopenings and consumers and businesses adapted to a pandemic economic environment. Stocks did all this before official data confirmed the recovery was underway. Note, the UK reported May 2020 retail sales rose 12.0% m/m on June 19, 2020, the first positive reading after March and April’s monthly declines.^[viii] At that point, both global stocks (38.6%) and UK stocks (36.5%) were nearly three months into a new bull market.^[ix]

Considering the recent surge in Omicron cases and the UK government’s implementation of its “Plan B” COVID rules, some worry lockdowns could return—again. That is a possibility, but despite all the speculation and leaks hinting at their return, lockdowns are political decisions that defy prediction, in our view. Johnson’s cabinet reportedly revolted against new restrictions this week. Maybe that holds, maybe it doesn’t. Yet while we don’t dismiss the economic damage associated with a new lockdown, the experience isn’t new to the UK. England entered a four-week lockdown in November 2020 and another this past January. On both occasions, retail sales fell, but they weren’t permanent setbacks—once restrictions eased, growth returned. (Exhibit 1) Crucially, UK stocks looked through it all, rising 26.1% from September 30, 2020 – March 31, 2021 despite a brief October pullback.^[x]

Exhibit 1: Lockdowns Didn’t Permanently Set Back UK Retail Sales

Source: ONS, as of 12/20/2021. UK retail sales volumes, November 2019 – November 2021.

Now, UK retail sales won’t necessarily follow this exact pattern if lockdowns return, but society and markets have seen this movie before—worth keeping in mind amid warnings of slowing December sales. Restrictions could cause retail sales to slow or contract—perhaps even sharply. But at this point, we don’t think a few renewed lockdowns will automatically wallop the global economy or stocks again, as they likely lack the scope and surprise power they packed in February and March last year, when the entire developed world shut down without notice or precedent. Stocks likely recognize growth can snap back quickly once restrictions ease and that a handful of high-profile lockdowns aren’t the same as the global economy suddenly coming to a stop. That doesn’t preclude short-term negativity, but it does suggest a repeat of early 2020 is highly unlikely right now.