Partner & Managing Director, London
UK retail continued to display strong growth of 4.2% in value and 3.2% in volume in September when compared to the same month in the previous year. Although year-on-year growth remains robust, this is a climb down from the peaks witnessed in May and July.
Within the retail sub-sectors, household goods led the charge with 10.9% and 10.4% growth in value and volume respectively for September when compared to the same month in 2017. Meanwhile, department stores crept into negative growth territory, following a poor summer relative to the rest of the retail market.
Nevertheless, many mid-market retailers have found themselves in "no-man’s land" as consumers, increasingly dominated by millennials, prefer to spend their time and money on experiences, whilst ordering everyday items online.
The key phrase used by beleaguered CEOs to communicate recovery plans is "experiential retail". Synonymous with this term is Harrods, who demonstrated the value of this proposition when they reported record sales of over £2 billion for their last financial year. Meanwhile, retailers that are making headlines for the wrong reasons have realised, possibly too late, that experiential retail could be the future. It will be the retailers who are fastest to integrate a digital offering complemented by a compelling in-store experience that survive.
Taking a step back to review market performance, the ongoing retail market growth appears in contrast to macroeconomic trends and individual performance of many key players: Growth in consumer credit is beginning to slow, which could translate into lower spending in the shops; footfall continues to decline as consumers continue to move towards online retail; the property market remains sluggish; and record annual losses and store closure plans lead the news.
The sudden and resilient year-on-year growth, which surprised everyone in May and continued through September, could be for several reasons. It is possible that, despite the gloomy headlines and economic uncertainty, the UK retail market is relatively solid and in the midst of a real growth phase. Alternatively, market volume growth may be playing catch up after stagnating in May 2017 (following the general election) and remaining low for 12 months until a heady mix of royal wedding, football fever and exceptionally warm weather improved consumer spirits.
Either way, retailers are still hopeful that the trend will continue into the Christmas period which proved disappointing for many in 2017. They’ll need something positive ahead of 2019 in an economy increasingly focused on a looming, uncertain Brexit.
Unemployment across the UK remained at a 43-year low of 4.0% in August, appearing relatively stable from the prior month.
However, the regional data showed definite winners and losers across the country, with improvements in just three regions offsetting an increase in unemployment across the rest of the country. Stripping out the unemployment data for North West, East and Scotland (where unemployment decreased by 6.4%), exposed a worsening of 1.6% across the remaining regions.
Figures also revealed that in the past year the number of Eastern European workers fell by 154,000 to 881,000, the largest fall since records began, prompting employers and business organisations to warn of potential skills shortages.
Stephen Clarke, Senior Economic Analyst at the Resolution Foundation, said:
"Firms who employ a large share of migrant workers need to think now about adjusting to a lower migration environment, in terms of the workers they employ, what they produce and how they operate."
Overall, increased competition for workers has driven annual growth in regular pay up to 3.1%, excluding bonuses, for the quarter compared to the same period last year.
The growth rate of pay continued to exceed consumer price inflation of 2.7% in August, indicating an increase in real wages. However, the Office of National Statistics (ONS) added that, when adjusted for price increases over the decade, this still left real wages at £11 per week lower than prior to the financial crisis in 2008.
Unsecured consumer borrowing rose to £215.2 billion in September, an increase of 5.6% when compared to the same month in the prior year. This growth rate has fallen for each the last three months, indicating that the Bank of England’s monetary policy is having the desired effect of slowing the increase in consumer demand for debt. However, a weakening in consumer borrowing, together with uncertainty surrounding the nature of Brexit, could reduce spending and economic growth.
In addition, the Bank of England warned that, whilst it expects London and Brussels to reach agreement, there is no guarantee it would reduce interest rates to support the economy in the event of a disorderly Brexit.
Governor of the Bank of England, Mark Carney said "Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction."
Footfall fell by 3.5% in September compared to the same month in the previous year which is a greater decline than in previous months.
The South West & Wales were the worst effected with a decrease of 11.3%, whilst Northern Ireland and the North East experienced an increase in shoppers with growth of 5.2% and 1.6% respectively.
The continuing downward trend of footfall against a backdrop of increasing internet sales, further highlights the unrelenting move by consumers towards internet shopping.
This added further pressure on the government to address the imbalance of business rates between high street and online retailers. Business rates are generated based on the open market rental value of a property, resulting in high business rates for high street shops, whilst online retailers incur significantly lower business rates on their out-of-town warehouses used to hold stock.
The Chancellor announced three steps in the Autumn budget to address the imbalance: the reduction of business rates by a third for small businesses (with a rateable value up to £51,000, meaning savings of up to £8,000); a £675m fund to rejuvenate high streets by developing supporting infrastructure; and the introduction of a new "Digital Services Tax" which comes into effect from April 2020, expected to raise a relatively small £400m per annum.
Whilst this will benefit smaller, independent stores, it is unlikely to ease the concerns of larger high street retailers.
Average house prices remained stable increasing by just £117 to £214,922 from August to September; the growth rate remaining at just 2.0% compared to the same month last year. This continues a deeper trend in the property market of subdued activity and a slowing down of year-on-year growth over the last few years, driven mainly by the South East and London.
Property prices tend to be reflective of wider economic outlook, which is being hampered by economic uncertainty surrounding Brexit negotiations.
Nationwide’s chief economist, Robert Gardner said "If the uncertainty lifts in the months ahead, there is scope for activity to pick up throughout next year."
However, a quarterly Reuters poll suggested that London property prices may continue to fall, impacted by the capital’s dependence on international investment. The poll of 30 analysts indicated an expected fall in London property prices of 1.6% this year and 0.1% next year, with the possibility of a crash in the event of a "no deal" Brexit.