UK retail sales strengthened in June and both consumer and business confidence bounced this month as sunshine, football and a lull in hostilities in the Middle East helped people feel more upbeat about the economy.
Some analysts suggested the promise of political change had also boosted sentiment, but economists warned that newfound optimism could prove shortlived as the flare-up in the US-Iran war pushed oil close to $100 a barrel.
The Office for National Statistics said the volume of goods bought from retailers rose 1 per cent from the previous month, a much stronger figure than the drop of 0.3 per cent analysts had expected.
It also revised up its estimate of retail sales in April, taking growth over the three months to June to 0.6 per cent, compared with the previous quarter. Annual sales growth rose to 4.2 per cent, from 3.5 per cent in May.
Meanwhile, the GfK consumer confidence index, a measure of how people view their own finances and the broader economic climate, rose six points to minus 17 in July, the largest month-on-month gain since November 2023.
“The sense of a fresh start following the appointment of a new prime minister surely accounts for some of this bounce,” said Neil Bellamy, consumer insights director at GfK, while also pointing to the feelgood factor of England’s progress to a third-place finish in the World Cup.
Business sentiment also improved more than analysts had expected, with the S&P Global flash UK PMI composite output index rising to a three-month high of 52.1 in July, up from 49.3 in June, signalling stronger activity.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said a recovery in the service sector was supported by stronger demand in hospitality, “boosted by good weather, the Fifa World Cup and more domestic holidays”.
However, economists warned that the latest escalation of the US-Iran conflict and new US tariffs would add to uncertainty for businesses.
“The Burnham boost will be tested by higher energy prices and tariff uncertainty,” said Rob Wood, chief UK economist at the consultancy Pantheon Macroeconomics.
Consumers have been helped in recent weeks by a temporary respite from higher fuel costs and an easing of broader inflationary pressures.
The ONS said unusually hot weather and discounting by retailers helped bolster sales in June, with retailers reporting strong sales of clothing and of warm-weather goods such as fans, air conditioners and sports equipment. Fuel sales remained weak, despite an easing in petrol prices.
Thomas Pugh, chief economist at the audit firm RSM UK, said the economy had received “a timely boost from World Cup fever, good weather and lower fuel prices in July” but now faced a “tougher backdrop”.
“A more resilient economy combined with higher energy prices means the risk of another rate hike later this year has increased,” he added.
The Bank of England is widely expected to keep interest rates on hold at 3.75 per cent when it meets next week. Analysts said rate setters would be encouraged by evidence in the S&P survey, and in its own business surveys, that wage growth was slowing and broader price pressures were easing.
But a fresh surge in energy prices could change this. Ashley Webb, senior economist at the consultancy Capital Economics, said that while “stagflationary” pressures were easing, “all of these moves may not last”.
The improvement in GfK’s overall consumer confidence index was driven by more positive perceptions of the UK’s general economic situation, with a more modest uptick in people’s view of their personal financial situation.
The survey of just over 2,000 people was conducted in the first half of July, just before Andy Burnham was appointed Labour leader and prime minister, and before the latest escalation in the US-Iran conflict.
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The greater optimism among consumers is not yet underpinned by any clear evidence of the economy gaining momentum.
GDP growth has slowed since the start of the Iran war, with output rising just 0.1 per cent in May, following a 0.1 per cent contraction in April.
Two BoE business surveys published on Friday highlighted the weakness in the jobs market, with employers expecting to keep headcount broadly flat or cut it slightly over the coming year.
The BoE’s agents reported evidence of people moving into self-employment or taking on additional zero-hour roles because the employee roles advertised did not offer enough pay or security.
However, there has been some let-up in cost-of-living pressures, even before the Burnham administration’s early decisions to cut VAT from energy bills and cap bus fares.
Inflation data for June this week showed annual growth in consumer prices had eased to 2.6 per cent, lower than expected, with a drop in petrol prices and a slowdown in food inflation.