Insight

UK attention to retail: economic headwinds do nothing to deter consumers, retailers bounced back in August

October 5, 2017

Retailers enjoyed some welcome respite in August after a difficult July, with retail sales rising ahead of expectation. Despite sluggish economic growth, spending rose by 5.8% compared with August 2016, as consumers continued to rely on cheap credit to make up for their falling real incomes.

Price increases due to a weaker pound remained a factor across all sub-sectors, with value growth of 5.8%. Yet this did little to deter consumers, with volume growth of 2.8% when compared to August 2016.

Unemployment continued its record-setting run, reaching a new 42-year low of 4.3%. But real wage growth continued its recent trend, declining in the face of inflation at 2.9%. UK economic growth has now been revised down in the second quarter of 2017 to 1.5%, the lowest annual growth rate since 2013.

Although August was certainly a strong month for retailers, there’s a question of whether it can be repeated given the weak economic outlook. With the Bank of England looking to raise interest rates in the near term, the availability of cheap credit will likely decrease, forcing consumers to be more selective in how they spend their contracting pay packets.

Unemployment

As mentioned earlier, unemployment continued its record-setting run, decreasing from 4.4% to 4.3% in the three months to July. Yet real wage growth continued its decline, with a nominal increase in wages of 2.1% out stripped by a 2.9% increase in inflation.

The rapid growth of the gig economy is seen as a major driver behind this, with self-employment rising to 15% of the workforce despite stagnant hourly rates. The continued decline in real wages will worry retailers, as consumers adjust their spending habits to compensate for their shrinking purchasing power.

Consumer credit

Consumer lending continued its expansion in August, rising to over £200 billion. In what has become a worrying trend, consumers continue to rely on credit cards and personal loans to maintain spending habits in the face of a declining real wage—raising concerns at the Bank of England.

Consumer credit was described as a “pocket of risk” by the Bank’s Financial Policy Committee, warning lenders to increase their capital buffers to provide adequate protection. Mark Carney, the Bank of England’s governor, indicated that a rate rise would occur in the short term, likely decreasing the availability of cheap credit, as the costs of borrowing increases.

Footfall

Brick-and-mortar retailers continued to suffer in August as footfall decreased by 2.4% compared with August 2016. This represents the fifteenth consecutive month of year-on-year decline as consumers continue to rely on online shopping.

Even a record-setting August heatwave could not tempt consumers to the high street of the nation’s capital, with footfall in London decreasing by 4.1%. The East continued to be the most challenging region, with the East Midlands and the East suffering declines of 4.2% and 4.6% respectively.

Property prices

The housing market continued to cool in August, with annual price growth now standing at 2.1% compared with 2.9% in July. This is relatively consistent with what has been seen throughout 2017, compared with the 4-5% growth rate in seen in 2016.

House prices are heavily tied to economic sentiment and with sluggish growth it is not surprising that consumers are steering clear of the housing market. Weak demand has been somewhat offset by a reduced supply, with estate agents’ books close to a 30-year low, providing welcome boost to the average selling price.

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