Today the ONS released figures for its Retail Sales Index (RSI) for November. With sales growing strongly, consumers still appear to be the mainstay of the UK economy. Whilst we agree that sales have been solid in the post-referendum world, neither our own figures (See chart below) nor our conversations with people in the industry suggest that we’ve had quite the boom suggested by the ONS in recent months.
But first, you could be forgiven for being slightly confused as to how fast sales are actually growing as there are a lot of different numbers out there. The ONS headline figures are growth in volumes on a seasonally adjusted basis. So that’s sales having removed the price effect and having adjusted the figures to remove seasonal changes in data (The idea being that it gets to the underlying trend growth). For November it reported growth of 0.2% over October and 5.9% compared to November 2015.
In contrast, when we report the Retail Sales Monitor (RSM) figures we report growth in values (i.e. we don’t remove the impact of price changes) and we don’t seasonally adjust the data. The RSM showed 1.3% growth of UK retail sales in November. There is an equivalent ONS figure (sales value ex. fuel NSA), which this month suggested sales grew 6.1%. A substantial margin over the RSM.
Why are the ONS and BRC reporting sales are growing at different rates?
There are differences between the RSM and the RSI which mean we don’t expect figures to be exactly the same, although in the past they have tracked very closely for extended periods.
The key differences are in coverage and the use of modelling and extrapolation to estimate data that aren’t collected. The RSI data in theory includes data from 90% of the market (although see the comment on revisions below) and extrapolates what it does not have, whilst the RSM includes 60% of the market, but does not make any estimate of the data it does not have and just reports the growth of the sample it does collect from.
Small businesses appear to be growing at exceptional rates in the ONS figures
Once you dig down into the data it appears to be the growth of small businesses (~20% of retail sales in the UK) that have been the biggest source of the divergence between the RSM and RSI in recent months. The RSM only captures a handful of small businesses, whilst the RSI uses a sample of around 4,000 small businesses out of just over 170,000 and extrapolates to the rest of the market.
The ONS growth rates for small businesses for November (and October) are extraordinary at 18.5%, the highest since reporting began. Taking account of the fact that around 10% of retailers go out of business each year, of those that have remained in business over the last year, many have grown at more than 20% a year on average. Whilst some small businesses do experience high growth rates, not all do, and the fact that average growth rates are three times higher than 2 months ago needs some further exploration.
There have also been some significant revisions in the ONS data
With 90% of the market represented in the ONS data at first release, the updating of figures once late submissions have been received should have a minimal impact on overall result. However, there have been some large revisions. May’s figure for sales value growth (ex-fuel NSA) was 3.4% growth when reported, today’s release shows it at 2.6%. Last month’s small business growth was revised down 1.4 percentage points between this month and last month. That suggests that either 90% coverage isn’t being achieved or that there are large variations in the quality of data submitted as part of that 90%.
Collecting data on an industry with nearly 200,000 businesses is not easy, and hence the fact that different indices with different methodologies find varying results is not surprising. Given the confidential nature of data collection it is difficult for us to fully compare notes. However, we can look at how figures fit in with other data. Wage growth has slowed in real terms and whilst consumer lending is growing strongly, it’s difficult to explain the rates of sales growth suggested by the ONS figures. However, we do agree that the general message of solid growth in sales in October and November is correct.
Next year consumers will face growing headwinds as inflation picks up and economic growth slows, which will likely check that pace of sales growth we have seen at the end of this year.