Sterling fell to a fresh 37-year low against the dollar on Friday after weaker-than-expected retail sales sparked fears the UK economy is already in recession.
Sterling fell more than 1% against the currency to $1.1351, its lowest level since 1985, in part reflecting the dollar’s broader strength as well as specific concerns about the UK outlook. The pound also hit a 17-month low against the euro, with €1 worth 87.66p.
It comes as the latest official data showed that defaulting consumers cut spending more-than-expected in August, as UK retail sales fell 1.6%. Economists had forecast a more modest 0.5% decline.
The sharp drop in sales came after an upwardly revised 0.4% rise in July, which appears to be a temporary rebound after the Queen’s platinum jubilee celebrations in June.
The drop in sales over the past month was broad-based, with gas stations, supermarkets, clothing and furniture stores all reporting declines, the Office for National Statistics said.
retail graphics
The last time this happened was in July 2021 when all legal Covid restrictions on hospitality were lifted and people went to bars and restaurants.
The ONS said “rising prices and the cost of living” were hurting retail sales in the UK, and economists warned there were signs of an economy already in recession.
Olivia Cross, an economist at consultancy Capital Economics, said that while she expected the UK recession to deepen after the government’s £150bn energy freeze plan,
She said: “The 1.6% fall in retail sales in August confirms our view that the economy is already in recession. Retail sales are likely to continue to struggle as the cost of living crisis hits harder in the coming months. But even so, the Bank of England will have to raise rates aggressively.”
Capital Economics said the extra £150 billion injected into the economy will force the bank to raise interest rates by a further percentage point from its previous estimate, meaning the bank’s base rate is expected to fall from that current level of 1.75% will rise to 4%, adding more pain for those with mortgages.
Martin Beck, chief economic adviser to the EY Item Club, said: “Real household incomes are still on course for a significant decline over the next 12 months. And with unemployment likely to rise, albeit moderately by the standards of past downturns, and the geopolitical outlook also fraught with uncertainty, confidence is unlikely to recover.
“So the recession that retailers are in right now is likely to last through the rest of this year and into 2023.”
To emphasize the magnitude of the downturn, online sales fell from 26.3% in July 2022 to 25.7% of all sales in August 2022; although transactions over the internet remain well above the pre-coronavirus level of 19.8%.
Sales at supermarkets and other grocery stores fell 0.8% in August, down 1.4% from their pre-pandemic February 2020 level.
Register for business today
Get ready for the workday – we’ll snap you up every morning with all the business news and analysis you need
Data protection: Newsletters may contain information about charities, online advertisements and content sponsored by third parties. You can find more information in our data protection declaration. We use Google reCaptcha to protect our website and the Google Privacy Policy and Terms of Service apply.
Gasoline and diesel sales fell by 1.7% despite falling prices.
Department store sales fell 2.7%, while home goods stores declined 1.1%, mainly due to declines in furniture and lighting stores.
Feedback from retailers suggested that consumers would rein in spending following a broad price hike.
However, alcohol and tobacco sales increased by 6.3%.
“Shoppers are simply buying less to offset price increases,” said Lisa Hooker, PwC industry leader for convenience stores. She said this is a concern for retailers as they approach crucial Christmas shopping time.
For the first time, without the impact of inflation, grocery sales volumes actually fell below pre-pandemic levels, showing shoppers are wasting less and being forced to be more careful about what they put in their shopping carts.
She added: “As we approach the critical ‘golden quarter’ in the run-up to Christmas, retailers will be looking forward to the outcome of next week’s mini-budget.
“Confirmation of an energy price cap and the possibility of tax cuts can spur faltering consumer spending, but businesses will also seek help to mitigate their own rising utility costs. Add to that the input cost inflation and wage increases they are already struggling with.”
Comments are closed.