Partner & Managing Director, London
UK retail continued its strong summer with another month of solid like-for-like growth in August, posting high value and volume growth of 4.8% and 3.5%, respectively. This rounds off a summer to remember for the high street, which saw several high-profile restructurings such as House of Fraser and Homebase, despite relatively high year-on-year growth.
Whilst overall the picture for August was strong, certain sectors fared better than others. Household goods were the clear winner, posting the largest monthly jump in sales since May 2016 with value and volume growth of 11.1% and 10.8%, respectively. Fashion on the other hand continued its recent poor run, with negative value and volume growth despite reported heavy discounting.
The stronger-than-expected growth in August will serve as vindication of the Bank of England's decision to raise interest rates to 0.75% in August, proving that consumer spending remains more resilient than many of its detractors anticipated.
Overall the UK economy continued to follow the trends seen throughout 2018 with wages showing only meagre growth in real terms, despite unemployment falling to a record low of 4.0%. Footfall continued to fall year-on-year despite the warm weather, marking 31 months of year-on-year decline.
As we enter October, retailers who have performed well will hope to prove that their recent string of strong results is not just due to an unseasonably warm summer and is instead a reflection of broader economic growth and an improved and modernised offering to their customers.
The ONS reported that the unemployment rate fell to 4.0% in the three months to August, the lowest rate since February 1975. The number of job vacancies also reached a record high of 833,000 in the three months to September, suggesting that unemployment may continue to decline over the coming months.
Frustratingly for the Bank of England, the low levels of unemployment have done little to help UK real wage growth, with the average worker earning £760 less than a decade ago according to the Institute for Fiscal Studies.
UK workers' total earnings, excluding bonuses, increased by 2.9% in the three months to July. However, the unexpected increase in inflation to 2.7%, the highest level in six months, indicates the small growth in real wages experienced by the UK's consumers in recent months is showing signs of subsiding.
Unsecured consumer borrowing rose to £214.2 billion in August, an increase of 5.6% when compared to the same month in the prior year—the smallest growth rate since the start of 2016. This will come as welcome news for the Bank of England, who have been keen for lenders to tighten their underwriting standards, amidst fears of a mounting consumer debt bubble.
Since the 2016 Brexit vote, the UK economy has largely been supported by surprisingly resilient consumer spending maintained through increased debt. As we approach the Brexit deadline in March 2019, weakening consumer borrowing could point towards lower levels of spending and therefore economic growth—potentially bad news for the retail sector.
Despite the warm summer weather, August provided high street retailers with little sunshine. Footfall contracted by 2.8% compared to last year, suggesting the downward trend is not subsiding.
The South West and Wales continue to be worst affected by footfall declines, seeing a 9.5% drop compared with August 2017. Northern Ireland was the only region to see an increase in footfall compared to last year.
The downward trend continues to worry retailers, with the BRC suggesting that the government should "take action now and commit to a two-year freeze on business rates to help reduce the pressure of this disproportionate tax on retailers and allow for a fundamental reform of the business taxation system."
Average house prices in the UK fell by £2,266 to £214,745 in August 2018, the biggest monthly decline for six years. House prices are typically tied to economic sentiment, so with sluggish growth and uncertainty around Brexit, it is not surprising that the market remains challenging.
August saw the Bank of England increase interest rates for only the second time in a decade, the rate increasing by a quarter of a percentage point to 0.75%. While homeowners with a variable rate mortgage will face an increase in payments, commentators have noted that the impact of the interest rate increase on UK households "is likely to be modest."