Soaring costs and tight wage rises leave retail sector struggling

More evidence about the strength of the UK’s economic recovery will be revealed when official figures for Government borrowing and retail sales are released.

Retail sales volumes returned to modest growth in June as retailers started their summer sales early, figures released on Thursday are expected to show.

But the increase will not be enough to make up for the 1.4 per cent decline in the previous month.

Retailers including Marks & Spencer started their sale early to attract cash-strapped consumers, who are cutting spending in the face of soaring costs and muted wage growth.

The early discounting comes as companies such as TJ Hughes and Jane Norman have entered administration while mother and child retailer Mothercare, entertainment group HMV and chocolatier Thorntons have all announced plans for store closures.

Victoria Cadman, an economist at Investec Securities, forecasts that volumes will rise 0.8 per cent.

She said: “Despite this expected improvement in the June data, we suspect that retail sales will record relatively subdued growth for a while longer as disposable incomes continue to be squeezed.”

The early start to summer sales would act as a downward drag on sales in July, she added.

Meanwhile, the Government’s borrowing figures released on Thursday are also expected to show a modest improvement.

Last month, it was revealed that public sector net borrowing, excluding financial intervention such as the bank bailouts, was £17.4bn in May, compared to £18.5bn in the same month last year.

Brokers expect Thursday’s second quarter trading update from B&Q to show sales have fallen by as much as five per cent on a like-for-like basis.

B&Q increased sales by 1.5 per cent to £1.1bn in the three months to April 30.

Chief executive Ian Cheshire suggested that the warm weather and early spring may have brought forward some outdoor sales and that he expected the rest of the year to be tough, especially in the UK.

Retail analysts at broker Deutsche Bank also suggest that the impact of Focus DIY’s closing down sale pulling customers away could account for as much as three per cent of any decline.

While they argue in the longer term the overall reduction in DIY shed space should be good news for B&Q, even if UK housing transactions do not recover, they have cut their 2011-12 profits forecast for B&Q by £18m.

Deutsche Bank estimates Kingfisher’s full-year profits for the year to January 2012 will reach £780m, up from £670m.