-British Retail Consortium sales growth slows further during July.
-Warm weather boost food and beverages, crimps non-food spending.
-Outlook for the sector is further challenged by BoE interest rate rises.
© photobuay, Adobe Stock
UK retailers remained under pressure during July, according to the latest British Retail Consortium (BRC) report on high street activity, as a continued slowdown in non-food spending more than offset an increase in food and beverages brought on by abnormally hot weather last month.
Total sales measured by the British Retail Consortium rose 1.6% during July, down from 2.3% back in June, while the more important measure of like-for-like sales rose only 0.5%. This latter number was down from 1.1% in June and below the market consensus for growth of 1.3%.
“Last month’s sweltering temperatures kept shoppers focussed on eating, drinking and keeping cool. Food sales had their best July in five years, while fans and cooling equipment flew off the shelves," says Helen Dickinson, chief executive of the British Retail Consortium. "However, total sales growth slowed as the heat laid bare the underlying weakness in consumer spending."
Dickinson says abnormally warm weather has worked against the retail industry this year by keeping shoppers away from the high street, when in prior years a pickup in temperatures has often led consumers to pull forward spending on summer clothing and household or garden items.
"The BRC found some evidence of a World Cup boost—beverage sales, for instance, reportedly were strong—but the boost was too meagre too offset fully the weather-induced weakness in non-food sales," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Even when the weather-drag on sales has faded, we continue to expect consumers’ spending to grow at only a modest rate."
This performance continues a trend highlighted by the Office for National Statistics in its own retail sales report for the month of June, which showed a decline in non-food spending offsetting increased demand for food and beverages during June's warm weather and the Football World Cup.
However, the numbers for June masked what was otherwise a solid performance from UK retailers during the second quarter, with sales growing at their fastest quarterly pace since 2004 even after the last minute disappointment.
"Although June’s retail sales figures were weaker than expected, over Q2 as a whole, sales still managed to post the strongest quarterly rise since 2004," says Ruth Gregory, a senior economist at Capital Economics, in a note to clients on July 19, 2018. "Since retail sales account for a fifth of GDP, this could add as much as 0.4pp to Q2 GDP growth."
Economists and markets care about the retail data because it is a leading indicator of economic growth and because of the influence that rising or falling consumption can have on inflation. It is inflation that central banks are attempting to contain when they raise interest rates, and rates themselves are the raison d'être for most moves in currency exchange rates.
Exact estimates vary but most economists agree that consumer spending accounts for a significant portion of UK GDP. However, UK retail spending has been erratic in recent quarters given the effect rising inflation has had on consumer purchasing power, as well as a period of poor weather that hit spending back in the first-quarter.
"Real wage growth will strength gradually, but business surveys point to a slowdown in employment growth over the next six months, while the recent increase in Bank Rate will take more momentum out of the housing market, hitting confidence," adds Tombs, who has a downbeat outlook for the UK consumer.
UK inflation rose from only a fraction above 0% in June 2016 to a high of 3.1% in November 2017 and, although the consumer price index has since fallen back to 2.4%, there is little difference between the current rate of inflation and average wage growth.
UK wages grew by an average of just 2.5% during the three months to the end of May 2018, which means consumers' "real incomes" are stagnating. This leaves little room for households to increase their spending, particularly as the Bank of England is now raising interest rates.
The Bank of England raised its interest rate by 25 basis points to 0.75% Thursday, marking only the second increase in Bank Rate since the financial crisis, but also a second within the last year. It's previous rate rise, to 0.5%, came in November 2017.
Tombs flags that not only will this mean households have to spend more in coming years in order to service thier mortgages, but also that the housing market will face further headwinds during the quarters ahead.
Stalling or even worse, falling, house prices often create a negative wealth effect where households tighten their belts in response to a perceived deterioration in their own financial position. Any negative wealth effect stemming from the housing market in the UK could mean retail sales growth slows even further during the quarters ahead.
This would be bad for UK GDP growth and, to the extent that it leads to a moderation of inflation and deters further interest rate rises, could also be negative for Pound Sterling.
UK GDP grew by just 0.2% during the first-three months of the year, down from 0.4% at the end of 2017, leading some observers to conclude the economy would slow again in 2018. Growth fell by 10 basis points to 1.7% in 2017.
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