Retail sales growth until April this year has trended up mostly on base effects. With the forecast of 5.0% yoy growth in May, average retail sales growth this year stands at 5.1% yoy as against the average of 1.8% yoy during the same period a year earlier and the average of 2.4% between 2011 and 2014. That said, the strong base effect from Q1 could well ensure that sales growth on a seasonally-adjusted basis actually slowed sequentially in Q2. Surely this presents downside risks to near-term consumption and growth forecasts. That said, the correlation between retail sales and overall consumption growth is quite weak.

Strong sales growth in 2011-12 was not reflected in overall consumption, and more recently, despite improving, consumption has lagged sales growth. The key to stronger growth in consumption remains further improvements in the labour market. Not only it is still operating below full-employment level, but also the unemployment rate actually rose in Q2 (based on April and May data and June expectations) as industrial growth struggled. Labour market has to improve substantially to boost wage growth and consumer confidence meaningfully. As a result, it is likely that consumption will take time to improve substantially, says Societe Generale.