Don't take comfort from latest retail sales data

While the consensus view of the latest retail sales figures issued today by the Office for National Statistics (ONS) is that retail sales are buoyant, Ted Scott, manager of the top performing F&C UK Growth & Income Fund, is less than convinced. Scott points out that the overall trend is one of declining momentum as the impact of interest rate rises starts to bite.

According to the ONS, retail sales rose by 0.4% between April and May. However, today's report also reveals that clothing and food retailers suffered a 3.5% drop in sales following a strong out turn the previous month.

"Although the overall results for retail were better in May, April suffered a decline in sales. In addition, whilst over the three months to April retail sales also did well compared to the same period last year, once again these figures are being contrasted with a rather uninspiring base. In short I do not think this is something to shout about," said Scott.

He also points to the fact that certain areas of retail are heavily reliant on seasonality, which is not sustainable.

"During the unseasonably good weather in April they performed well but the cold snaps we had throughout May saw them fall. At the same time, household goods sales experienced the reverse trend rising by 2.9% in May. Food, by its very nature, is a defensive sector and is less impacted by turns in the weather, which was reflected by only a small rise of 0.4% last month," he said.

According to Scott the recent rises in the Bank of England's base rate are also likely to feed through to consumer spending over the coming months.

"Although it may seem that the latest rate rises have done little to dampen sales growth, these tend to have a lagged effect on consumer behaviour which I believe we will start to see over the coming months," said Scott.

In a separate move, the ONS has published inflation data earlier this week, which Scott said painted a rather mixed picture.

"The widely reported fall in utility prices has pushed down inflation for the time being but with inflation currently at 2.5%, the Bank of England's Monetary Policy Committee is unlikely to change its mind and I believe we are still on track to see at least one more interest rate rise before the end of the year.

"In addition, housing data released yesterday by the Royal Institute of Chartered Surveyors has shown a decline in the key price balance index, which is evidence of a slow down in housing market growth. With a lion's share of the UK's wealth tied up in houses, this not only raises concerns for the housing market but for the wider economy in general," concluded Scott.

"For these reasons I remain cautious on the near term outlook and have positioned my portfolio defensively," he concluded.