UK attention to retail: UK high street struggles through February with underlying weakness in volume growth

Widespread snow and freezing temperatures made life tough for the UK’s retailers and consumers alike in February, as underlying volume growth in the sector continued to weaken and the economic environment showed few signs of improvement.

The UK retail market reported value growth of 3.6% and volume growth of 1.1% in February when compared with the same month in the prior year. The differential between the two figures continues to be driven by inflation, which was 2.7% in February as measured by the CPI. The inflation rate hit a six-year high of 3.1% in November 2017, but has since been edging lower as many of the previous import cost and price increases driven by the sharp depreciation of the pound after the EU referendum have now worked their way through the system.

Whilst pressures on the cost base are showing signs of easing, the UK’s retailers now appear to be facing faltering consumer demand. On a trailing last-12-months basis, volume growth has steadily declined to 1.8% in February from 4.5% in the same month last year.

This weakening in underlying volume growth is likely the result of a growing number of macro-economic pressures piling on households. Employment levels are at a record high; however real wages are only just beginning to increase, the property market is faltering, and unsustainable levels of household debt are weighing on consumer confidence. This could precipitate a sharp cut in spending further down the line.

Over the last year, the food and household good subsectors have been hit particularly hard as volume growth has remained broadly stagnant for both, perhaps a sign that consumers are increasingly slashing spending on big-ticket items or luxury grocery items.

Whether as a result of recent administrations, such as with Conviviality, wide-spread rumours of further company voluntary arrangements (CVAs) or reports of poor trading results, gloomy news continues to trickle in from the embattled retail sector. However, with the economic environment showing few signs of a rapid improvement, the UK’s retailers may have to hold on a little while longer for brighter news.

UNEMPLOYMENT
The ONS reported that the headline unemployment rate fell to 4.3% in the three months to January 2018, returning the UK labour market to the lowest levels of unemployment since the 1970s and reversing a slight increase in the prior period.

Record-low levels of unemployment and a growing transition from part-time to full-time work also pushed up wages by 2.8% across the same period, the greatest increase since September 2015. Although reported CPI inflation of 3.0% in January indicates that real wages are still contracting, recent surveys from the Bank of England suggest real wage growth should move into positive territory over the course of 2018, and perhaps, deliver improved trading conditions to some of the UK’s embattled retailers.

CONSUMER CREDIT
Unsecured consumer borrowing rose to £209.4 billion in February which reflects growth of 6.8% when compared to the same month in the prior year. Whilst the rate at which the UK’s consumers are piling on additional debt has slowed from around 8.0% 12 months ago, the current rate of borrowing still appears unsustainable against the backdrop of a challenging macro-environment and recent negative real wage growth.

Mounting consumer debt should remain a concern for the UK’s retailers. Although this supports spending in the short term, it could also pose a significant risk if unmanageable levels of debt spark a sharp cut in household future spending, similar to that experienced in the 2008 financial crisis. Indeed, projections from the Office of Budget Responsibility indicate that Britons could spend almost a third more on their mortgages and other debts over the next five years, with any increase in interest rates likely to hit households particularly hard after almost a decade of the base rate close to zero.

FOOTFALL
The weather provided high street retailers no favours in February, as footfall fell by 2.2% following freezing temperatures, widespread snow and a Siberian blast of wind that made some parts of south-east England colder than the Arctic at that point in time.
Whilst London bucked the trend to report an increase in footfall of 10.3%, this may reflect a low base in February 2017. It is likely that many of London’s shoppers opted to stay clear of the capital’s high streets as Storm Doris battered the city over a year ago, causing widespread flooding and transport problems.

PROPERTY PRICES
Nationwide reported house price growth of 2.2% in February when compared to the same month in the prior year. The UK property market has softened considerably since 2017, as the looming fear of Brexit and a pro-longed squeeze in real wages have dented consumer confidence and appetite for new property. The UK property market is likely to do little to support retail spending in 2018. The slow-down in the market is expected to continue throughout the year, albeit prices are likely to remain propped-up by chronic under-supply, a strong labour market and low interest rates. Nationwide predicts annual growth of 1.0%, although a decline in prices may be possible in some parts of the UK, such as London’s more expensive post-codes which appear particularly vulnerable.