Managing Director, London
The UK retail sector experienced its worst month of growth in July since the months immediately after the Brexit vote. A miserable end to the month weather-wise kept consumers off the high street and contributed to footfall falling by 2.7% compared to this time last year. Fashion retailers were hit particularly hard, as sales volume grew at the slowest rate for 8 months.
More broadly, sale volumes continue to lag, but value growth remains strong. The Office of National Statistics reported that total retail volume growth for July was 1.5%, down from 2.8% in June. Value growth of 4.3% is primarily cost price-driven and comes partly as a consequence of retailers passing on rising import costs to consumers.
Despite unemployment being at a record low of 4.4%, wage growth is slow and being outstripped by inflation of 2.6%. As a result, households are feeling a considerable squeeze on their incomes. The inflationary pressure, combined with low interest rates and decreased purchasing power from low wage growth, has seen households turn to borrowing to fund spending.
Sam Teague, an economist at IHS Markit, reported that survey data showed “households continued to report a greater need for unsecured borrowing to bridge the gap between pay growth and inflation.”
Consumer credit levels crossed the £200 billion mark in June and have risen steadily into July. Many households fail to foresee an end to the low interest rate environment, which currently bolsters consumer spending in the UK. This misconception could have grave consequences if the MPC were to vote to raise rates in the near future to combat inflation. Concerns over high levels of household indebtedness and irresponsible lending became particularly pertinent as we marked the 10-year anniversary of the global financial crisis in August.
Unemployment levels have decreased for the third month in a row. At 4.4%, unemployment has reached the lowest level since comparable records began in the 1970s. Employment sets a new record high of 75.1%, representing 32.07 million people in employment in the UK. However, wage growth continues to fall. Average weekly earnings for employees in Great Britain in nominal terms rose 2.1% in comparison with the previous year. With inflation at 2.6%, wage growth in real terms fell by 0.5%. The impacts of the Brexit vote continue to have belt-tightening ramifications in households across the UK as the amount people are earning cannot keep up with the increase in their household expenditures. The decrease in unemployment in the three months to July comes somewhat unexpectedly, as the Bank of England had previously concluded that the UK had reached its “natural rate” of employment with further changes unlikely. It is possible that the high employment level will increase workers’ bargaining power and help drive up wages as new staff become harder to find. This prospect, of course, remains uncertain.
Consumer credit rose to £201 billion in July. With consumers feeling the pinch from low pay growth and the rising cost of living, they are turning to their credit cards to fund spending. The Bank of England has stepped up scrutiny for lenders amid the growing concern that an unsustainable credit bubble has started to form. Key areas of concern that the bank singled out are credit cards and motor finance. Credit card providers offering long-term 0% promotional offers where new business is only marginally profitable, face losses if model assumptions turn out to be optimistic. Personal Contract Purchase deals in motor finance also pose a risk to lenders on the residual value of a vehicle, should the customer walk away after a few years of leasing.
The decline in footfall carries on in force, with the number of consumers visiting high street stores falling by -2.7% compared with July 2016. The East, North West of England, and Scotland experienced the greatest decline, but London did not fare much better with a 3.1% decline in shoppers visiting brick-and-mortar retailers compared to this time last year. Yorkshire has proven itself hardy to the current market trend. As the only region showing signs of growth, Yorkshire and the Humber fared well in July with a footfall increase of 1%.
Average house prices in the UK were broadly stable in July, rising to £211,671, an increase of £307 compared to the previous month. Annual house price growth has slowed to 2.9%, compared to 3.1% in June. The number of homes on estate agents’ books is at close to a thirty-year low. Fewer properties are coming onto the market and the level of new buyer enquiries is similarly sluggish. Housing market activity is likely to remain subdued due to the constraining impact of stamp duty changes—introduced in April 2016 and now being realised—combined with reduced household incomes and the uncertainty surrounding Brexit.