If business economists live and die by statistics then official data on
retail sales over the summer risked giving many of them a heart attack.
In June, the Office for National Statistics said retail sales grew by 3.5%
between April and May, the largest monthly increase since modern records began.
Coming against a backdrop of falling house prices, higher mortgage rates and
rising unemployment this figure appeared out of the blue.
Economists described the headline figure variously as “astonishing”,
“astounding”, “suspicious” and “eye-opening” – analyst-speak for “wrong”.
More importantly it ran counter to data from the British Retail Consortium,
the CBI and other surveys showing consumer confidence at an 18-year low. The ONS
data also contradicted the message from the Bank of England’s national network
of agents that growth in consumer spending was at “its weakest pace since the
autumn of 2005.”
A month later the ONS revised the May figure up to 3.6% but said that sales
in June fell by 3.9%, again another record.
The net effect pointed to a slowdown, in line with the anecdotal evidence. As
David Page, an economist at Investec Bank, put it: “Volatility [is] the price of
Averaging out the two figures one produces an average decline of 0.15% a month.
However, as Des McHale, the Irish mathematician and humourist, said: “The
average human has one breast and one testicle.”
Economists in the City admit they were highly sceptical of both sets of data
and believe the Bank would have taken the same view. “It was a major eye-opener
and I don’t think anyone seriously believes the figures – not even the Bank of
England,” says Howard Archer, chief UK economist at the analysts Global Insight.
A record surge in retail sales against a background of rapidly rising
inflation would normally be enough to prompt the nine economists on the Bank’s
Monetary Policy Committee to order a hike in interest rates. In the end, it did
not. Clearly, the MPC took the May number with a pinch of salt.
The minutes of its meeting on 9 and 10 July, a fortnight before the June
retail sales figures were published, showed it was clearly sceptical. It said
the “mismatch” between the official data and survey and anecdotal evidence was
“marked”, adding: “It was likely that the official expenditure data were
overstating the current strength of consumer spending.” In other words the Bank
has clearly decided to ignore the message from its official data service.
The ONS insists that both figures are correct. “Estimates of the increase in
the volume and value of retail sales in May, and the subsequent decrease in
June, reflect the actual changes in the turnover reported by businesses to ONS’s
large and comprehensive retail sales inquiry,” it said on the day it published
the June data.
The ONS data are based on a sample of 5,000 retailers, while the BRC has a
sample of 150 members while the CBI has 89 member respondents. The ONS says 96%
of the BRC survey is made up of large businesses, defined as employing more than
100 people and with a monthly turnover of £40m.
In contrast half the ONS sample consists of small firms with fewer than 10
employees, 30% from the medium-sized sector and the remaining one-fifth from the
large end of the market. it was the small and medium-sized sectors that drove
the growth in May.
However, it also reveals that May’s data was driven by irregular elements,
such as warm weather, which made up 3.4% of the 3.6% rise, while in June
irregular movements showed a 3.9% fall.
When the ONS announces revisions, it points out that these are not errors,
but the result of new figures replacing early estimates or of companies
correcting figures they submitted to the ONS.
Phil Shaw, chief UK economist at Investec Bank, says what added to the
confusion was that other ONS figures pointed to strong consumer spending in the
The breakdown of GDP figures showed spending grew 1.1% in the first quarter,
above the 0.7% average for the period 2000 to 2007. “It is not one figure, it is
the economic picture that the data have been painting since the turn of this
year,” says Shaw.
“While all the anecdotal evidence has signalled a consumer downturn, the ONS
is suggesting there is a boom. Marrying the two together is not easy.”
The Bank has been critical of some aspects of the ONS work. Its next big test
is in October when the ONS embarks on the first phase of a modernisation of the
national accounts that could see further back revisions.
The new figures, in what is known as the Blue Book, will give a definitive
answer to when the economic cycle that began in 1997 ended.
Since that is crucial to determining whether the prime minister has breached
his cherished Golden Rule, the ensuing political row will make the fuss over
retail sales look like a minor headache. Stock up with beta-blockers now.