Retailers Say Sales Up But Rising Inflation Makes For Gloomy Future

A survey of British retailers showed a rise in receipts in February despite increasing cost pressures and an overall pessimistic outlook for the future.

40% of the 128 respondents to the Consortium of British industry (CBI) Distributive Trades survey said sales volumes had risen over the year since February 2016, whilst 31% said they had fallen, giving a net balance of +9%.

This was up on the previous survey’s -8% balance.

Many respondents, however, noted a rise in cost pressures which may start to erode either profitability or sales depending on whether the business or the customer absorbs the cost.

“Meanwhile, for the first time in four-and-a-half years, retailers expect their business situation to deteriorate over the next three months. The most significant factor driving this more pessimistic outlook was rising cost pressures,” said the report.

Average selling prices are rising at their fastest rate in six years as the weak Pound makes imports and components more expensive. Prices are set to rise even higher next month, putting even more pressure on stretched household budgets.

“Average selling prices rose starkly on a year ago (+57%) at the fastest pace since May 2011,” said the report.

The outlook for Business Investment suffered from the general gloom associated with the future, as a balance of -10% of respondents said their investment intentions had fallen for the year ahead from a previously positive figure.

The next three months was seen as particularly trying, with a higher number of retailers expressing a concern that their business situation would deteriorate rather than improve – the first time there had been such a negative balance since 2012.

“The rebound in retail sales suggests that some of the recent gloom about a slump in consumer demand at the start of 2017 may be overdone.

“However, retailers remain cautious about their prospects, expecting fairly tepid growth in sales volumes next month against a backdrop of rising inflation that is likely to erode households’ purchasing power through the course of the year.

“As the impact of the weaker pound feeds through supply chains, retailers are trying to absorb some of the increase in their import costs through savings,” said Ben Jones, CBI’s principle economist.

Other details from the survey showed that Internet sales continued to grow but at a slower rate than the long-run average of 48%.

They are expected to increase in March, but also at a slower than average rate.

Clothing showed the highest rise in sales with an increase of 68%.

Despite the pessimistic outlook a net positive balance of respondents thought sales would be good in the next month of March, with 33% expecting an increase against 28% expecting a decrease, giving a balance of 5%.

The majority of respondents but headwinds down to factors associated with inflation – which is arguably as a result of a weaker pound following the referendum, or uncertainty associated with Brexit.

“In a supplementary question asked alongside the February survey, 42% of retailers cited rising cost pressures as a factor driving the deterioration in the business situation, with 35% citing uncertainty over Brexit/EU negotiations, 23% pointing to expected weakening in sales volumes and 18% citing an expected weakening in profitability.”

The report showed was not as a positive for the economy as the CBI’s recent Industrial Trends survey which noted a greater than expected boost to Industrial and Manufacturing Production.

That report revealed a net balance of +5 of respondents saying they had seen a pick-up in orders – which though marginal is well above the long-run average of -17%.

“The output expectations balance – which has a fairly good relationship with growth in the official measure of manufacturing output – picked up from +26 to +33. On the basis of past form, the three-month average of the balance is at a level consistent with quarterly growth in manufacturing output of about 1½% (see Chart), building on strong quarterly growth of 1.2% in Q4 in the official data,” remarked advisory service Capital Economics of the data.

Capital economics put the positive report down to the rebalancing effect on the economy of the falling Pound, which has helped manufacturers and exporters by making UK exports less expensive to foreign buyers.

However, the same effect has also increase cost pressures as much UK manufacturing makes use of foreign components which have become more expensive since the dive in the Pound.

“However, the drop in the pound is having a clear impact on price pressures too, with the price expectations balance rising to its highest in nearly six years. While this suggests that producer prices will rise sharply this year, it will take time for higher prices to fully feed through to CPI inflation. And intense competition is likely to mean that firms absorb some of the rise in costs,” remarked Capital’s Ruth Gregory.