After April’s dip, May’s GDP figures will have induced a sigh of relief from the powers that be. Growth of 0.5% may not be much to write home about, but given growing anxiety about the state of the economy a second consecutive month of decline would really have set nerves on edge.
Before we start popping the champagne corks, it’s worth looking at exactly why the economy bounced back in June. And it’s hardly a picture of economic health.
That’s ironic, because the main contributor to growth in May was visits to the doctor, with spending on GP visits and social work climbing 2.1%. Construction was also strong, recording the seventh consecutive month of growth at 1.5% driven by new private commercial and housing work.
The latter figures are, however, somewhat at odds with other industry data, not least the UK construction PMI index for residential construction which has signalled contraction in May and June, or recent figures from the Department of Levelling Up which suggested that housing starts and completions in the first quarter had fallen by 7.3% and 10.9% respectively. Either way, the jury is certainly out on the continuing health of the housing market.
What we can be sure about is that the all-important services sector, which accounts for two-thirds of UK GDP, is seeing many areas of weakness. Output in consumer-facing services fell 0.1% in May, with the largest negative contributor being wholesale and retail trade.
That would appear to corroborate recent data from the British Retail Consortium which showed that total retail sales fell 1% in May, marking three consecutive months of declines. “Sales volumes are falling to a rate not seen since the depths of the pandemic, as inflation continues to bite, and households cut back spending,” said its chief executive Helen Dickinson.
The trade body observed that shoppers are trading down to cheaper brands and cutting back on buying homeware and white goods, while retailers are finding themselves “caught between significant rising costs in their supply chains and protecting their customers from price rises.” In other words, facing either a nasty margin squeeze or lost trade.
Nor does it seem that households are drowning their sorrows to cope with the economic pain, with food and beverage service activity dipping sharply. That tallies with the latest trading update from Britain’s biggest landlord, JD Wetherspoon (JDW) , which saw its shares revisiting pandemic lows as it reported another quarter of negative sales growth and saying it expects to report a higher-than-expected loss of £30m this year.
To be fair to Wetherspoon, it’s been investing heavily in staffing and property, which it expects to stand it in good stead in its next financial year. That makes sense, given reports that first the pandemic and now inflation are continuing the long-standing trend of pub closures, with a 6.4% decline in pubs and restaurants since March 2020 according to the CGA Outlet Index. Put simply, Wetherspoon is betting that the strongest will ultimately prevail, and some investors must be looking at the lowly share price and thinking the same.
But when is another matter altogether, because as the last few years suggest, the best laid plans often don’t work out quite as hoped. Take the travel industry, for example, another big contributor to this month’s GDP figures – and probably a major source of pain for other domestic consumer industries as households prioritise jetting off for some sun over anything else.
The sector's better operators quickly rebuilt capacity cut during the pandemic to now take advantage of massive pent-up demand. Now they find their share prices pulverised as airports struggle to cope with the astonishing recovery in passenger numbers and cap flights and costs mount up. Easyjet’s (EZJ) shares, for one, now stand at 10-year lows.
But like the various pub groups and retailers that have found themselves consistently wrong-footed by factors outside of their control over the last few years, that doesn’t mean they’re a bargain yet. Like a wait at UK passport control or a queue at a busy City bar, there’s no telling how long consumer industries' pandemic hangover could last.