Retailers enjoyed buoyant sales growth in February, as Britons continued to spend (and borrow) despite Brexit fears. However, the month also brought with it a spike in inflation, which is predicted to persist throughout 2017 and erode real incomes and consumer spending.
The UK retail market reported value and volume growth of 5.2% and 4.1% respectively when compared with February 2016—a strong performance (see figure 1).
Nonetheless, many believe growth in the sector may soon run out of steam, as economic factors make life increasingly difficult for UK households. Most retailers’ hedges have now ended, and many are now unable to mitigate the impact of higher import costs solely through squeezing their supply chains. As a result, numerous firms have begun to increase prices, and inflation (as measured by the CPI) leaped to 2.3% in February.
The ONS reported that the unemployment rate edged down to 4.7% in the three months leading to January 2017, which reflects the lowest rate since 1975. Concerns that the recent improvements may reverse in 2017 have yet to be confirmed, however wage growth (excluding bonuses) also fell to 2.3% across the same period.
The gap between wage growth and inflation, which jumped to 2.3% in February (as measured by the CPI), appears to have all but closed. The subsequent squeeze on real household incomes and spending is likely to reflect a significant headwind for many retailers in 2017.
Consumer borrowing continued to rise rapidly in February, as unsecured consumer credit increased by 8.1% when compared with the same month last year, bringing the total level to £196.0 billion.
The Bank of England is becomingly increasingly worried about the trend. The rise of household debt to unsustainable levels prior to the financial crisis was a key aggravating factor in the recession that ensued. However, whether Threadneedle Street will act on these concerns to tighten lending conditions and make credit more difficult to obtain remains to be seen, as recent monetary policy meetings show a divided opinion.
Footfall across the UK declined by 3.7% in February—the sharpest drop since December 2015. The extreme weather brought by Storm Doris may have exacerbated the decline to an extent, however dwindling numbers of shoppers on the high streets reflect a long-term trend which shows little sign of abating.
Retail parks have been one of the few formats to buck the downward trend across recent years. However, it would appear they are now also struggling to attract shoppers, as data from BRC-Springboard indicated that retail park footfall fell by 1.6% in February. This reflects the fourth month of decline and the sharpest drop since November 2013.
Data from Nationwide indicates that the average UK house price in February was £205,846, which reflects a 4.5% uptick compared to the same month last year. Although the property market has cooled slightly following the referendum vote, predictions that house-price growth would rapidly dip into negative territory following the result now appear to be overblown.
Nonetheless, Nationwide still predicts weak growth for 2017 of around 2% following the first average price fall in two years, which is likely to do little to boost consumer confidence and spending.