What can Tesco Q1 numbers tell us about the UK economy

If, like me, you’ve been surprised at the resilience of the UK economy during the first quarter of this year then you’re not alone.

Having come off the best quarter since the same quarter a year ago, the resilience of the UK consumer has been most welcome at a time when there had been an expectation that last year’s October budget might prompt a sharp slowdown.

That this didn’t play out as expected has been mainly down to the resilience of the UK consumer where we’ve seen retail sales for the first 3 months of this year, rebound strongly after a weak end to 2024.

So far this year we’ve seen retail sales growth of 1.7%, 1%, 0.4% and 1.2% for the months January to April, with the strong performance being borne out by decent sales growth from a variety of retailers, including Tesco, Next, as well as B&Q owner Kingfisher to name but a few.

Nonetheless when we look at the broader macroeconomic data, we can also see that hiring is slowing, and that the unemployment rate has started to edge higher, rising to its highest level since 2021 so cracks are appearing already, and that’s before we factor in the effects of what has become known as “Awful April” and sharp rises in household bills.

The macro picture is also being clouded by increasing concern about the reliability of the statistical data being produced by the ONS, with doubts about the unemployment numbers being extended to the trade numbers, which are required for accurate GDP data, as well as inflation data, namely PPI, and now more recently CPI.

At a policy level this not only makes the Bank of England’s job harder when it comes to setting interest policy, but it also makes it much harder to know what’s happening under the hood of the UK economy.

Against that backdrop it makes sense for the Bank of England to look at AI when it comes to analysing economic data trends, when it comes to its data models as recently mentioned by external MPC member Megan Greene in a recent speech. They can hardly do any worse than the ONS which is becoming increasingly unfit for purpose.

Of course, there is another way to gauge where the UK economy is when it comes to its biggest sector, which is services, and that’s to look at the trading updates of its biggest retailers as this probably gives a better indication of consumer trends than any data the ONS can furnish us with. It does require a bit more work on our part sadly, but those are the breaks. If you want a job done, best do it yourself if the official stats body isn’t up to the task.

Tesco’s recent full year numbers told us a great deal about how the UK consumer was doing back in April when the UK’s number one supermarket reported LFL sales growth of 3.1%, with the UK market seeing a 4% increase, while revenues rose 2.5% to £69.9bn.

While impressive on the surface, digging a little bit deeper also gave an insight into where the UK economy had been showing some areas of weakness.

Its Booker business was the main drag when it came to underperformance with LFL sales falling 1.8%, largely due to weakness in its tobacco business, as well as the fast-food market serviced by its Best Food logistics brand.

This business supplies the likes of Burger King, Pret a Manger, Pizza Express, Zizzi, Nando’s and Pizza Hut and saw a LFL sales decline of 5.1% to £1.44bn, although in the case of Pret their exorbitant prices may have also played a part.

In another sign that Tesco is already feeling the effects of the increased national insurance and minimum wage costs, which it said would cost it £250m, management announced recently that some Tesco Express stores would operate shorter operating hours in an attempt to lower its cost base.

Given this backdrop it will be interesting to see how Tesco has performed when it releases its Q1 numbers on the 12^th June next week, and whether they see the need to adjust their guidance for the current fiscal year.

As a reminder this guidance was changed back in April, Tesco saying they expected group adjusted operating profit for the upcoming fiscal year to be lower than 2025, but only dropping it marginally to between £2.7bn and £3bn.