The Pound Falls After Further Signs of UK Retail Sector Slow-Down

Pound Sterling retains a negative bias against the Dollar and the Euro with another leg lower in the currency complex being sparked on the back of the release of data which showed a further slowdown in high-street retail sales as shoppers cut spending, especially on non-essentials.

The UK economy relies heavily on the spending-prowess of its citizens; indeed the robust response by the UK economy to the Brexit vote has been deemed to be a result of the UK consumer being unfazed by the vote.

However, there are signs that the consumer is starting to become more cautious, and therefore UK economy activity should ease back as a result.

The British Retail Consortium’s (CRB) Retail Sales Monitor for February showed a like-for-like decline in overall retail sales of -0.4% compared to a year ago.

This was well-below the 0.2% forecast by analysts although it was a recovery from January’s -0.6% result.

Food sales managed to remain resilient, increasing by 0.6%, as the main areas of decline were in the non-food sector, although toys were a notable exception due to the February half-term.

Non-food showed a three-month decline which has not happened since 2011, said the CRB.

The data indicates consumer spending is retrenching which is likely to impact on Bank of England (BOE) policy decision-making.

There were already signs in a speech from the new Deputy of the BOE, Charlotte Hogg, on Monday that inflation was abating, after she suggested a sharp drop in consumer spending posed “some of the biggest risks” to the UK economy.

The BOE currently has a neutral stance but Hogg’s comments as well as a continued slowdown in consumer spending, which contributes to most of GDP, would probably encourage them to consider more easy monetary policies rather than raising interest rates any higher.

A move to increase QE or cut interest rates would weigh heavily on Sterling since investors favour currencies with higher interest rates where they can bank their money for a better return.

A significant portion of shoppers, 81%, expect prices to rise in the coming year and may be being parsimonious before the fact.

“The return of a little inflation to the aisles is also playing its part and shoppers are bracing themselves for more to come: 81 per cent believe food prices will rise in the coming year, the highest level of anticipation since September 2016. This puts the emphasis back on hunting for value, with 63 per cent of shoppers favouring everyday low prices over more special offers,” said Joanne Denney-Finch, Chief Executive of IGD; the research and training charity to the UK retail sector.

Advisory service Capital Economics which have been optimistic about the resilience of the UK economy nevertheless said the decline was significant and decided to revise down their Consumer Spending estimates on the back of the data.

“Today’s survey adds to the signs that the recent strength in consumer spending growth is fading fast. That said, given supportive credit conditions, a resilient labour market and upbeat confidence by past standards we still think that spending should still maintain a decent amount of momentum. As such, we have pencilled in a slowdown in spending growth from around 3.1% in 2016 to about 2.0% in 2017 and 1.5% in 2018,” says Capital’s Ruth Gregory.

Sterling spent most of Tuesday dribbling lower against the other majors, falling to lows of 1.1530 to the Euro and 1.2193 to the Dollar – breaching the key 1.2200 mark.

House Prices Stall

Meanwhile, data from Halifax showing signs of a slowdown in House Prices on Tuesday morning was interpreted as a further sign wages were struggling under the strain of rising inflation.

The Halifax data showed house prices coming in below expectations at 0.1% higher in February compared to January (0.3 exp) and 5.1% higher from a year ago compared to 5.3% forecast.

The slide was due to “National house prices are being increasingly squeezed by a big slowdown in wage growth across the UK,” said Business Insider’s Thomas Colson

A recent report from the Institute for Fiscal Studies in November 2016 said the outlook for British wages was "dreadful"  expecting the squeeze on pay to last over a decade.

Colson argues the squeeze on incomes is now starting to affect the property market after decades of runaway price growth.

He quotes Samuel Tombs, chief UK economist at Pantheon Macroeconomics, as saying "The slowdown in households’ income growth is increasingly constraining the housing market.

"Year-over-year growth in prices has halved of the last nine months, and it looks set to carry on weakening," he added.

Nevertheless Colson admits that even with income constraints biting house prices will probably continue rising due to a chronic supply shortage.