Pound falls as weak retail sales raise fears UK economy could be in recession | Economy

The pound fell to a fresh 37-year low against the dollar on Friday after weaker-than-expected retail sales raised fears the UK economy was already in recession.

The pound fell more than 1% against the currency to $1.1351, its lowest level since 1985, partly reflecting the broader strength of the dollar as well as specific concerns over the outlook for Britain . The pound also hit a 17-month low against the euro, with the euro worth 87.66p.

It comes as the latest official data shows cash-strapped consumers cut spending more than expected in August, when retail sales volumes in Britain fell 1.6%. Economists had predicted a more modest decline of 0.5%.

The sharp drop in sales came after an upwardly revised 0.4% increase in July which appears to be a temporary rebound after the Queen’s Platinum Jubilee celebrations in June.

The fall in sales last month was widespread, with petrol stations, supermarkets, clothing and furniture stores all seeing declines, the Office for National Statistics said.

The last time this happened was in July 2021 when all legal Covid restrictions on hospitality were lifted and people headed to bars and restaurants.

The ONS said “rising prices and the cost of living” were hitting retail sales in Britain, and economists warned there were signs of an economy already in recession.

Olivia Cross, an economist at consultancy Capital Economics, said while she expected Britain’s recession to be shorter and milder after the UK’s £150billion energy price freeze plan government, all indicators showed that an economic contraction had already begun.

She said: “The 1.6% drop in retail sales volumes in August confirms our view that the economy is already in recession. Retail sales will likely continue to struggle as the cost of living crisis hits harder in the months ahead. Nevertheless, the Bank of England will still have to raise interest rates aggressively.

Capital Economics said the extra £150bn injected into the economy will force the Bank to add another percentage point to interest rates from its previous estimate, meaning it expects as the bank’s base rate drops from the current level of 1.75% 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 track for a significant decline over the next 12 months or so. And with a likely rise in unemployment, albeit modest compared to past recessions, and a geopolitical outlook equally fraught with uncertainty, confidence is unlikely to see a resurgence.

“Thus, the recession that retailers currently find themselves in is expected to persist for the remainder of this year and into 2023.”

To underline the extent of the slowdown, online sales fell to 25.7% of all sales in August 2022 from 26.3% in July 2022; although web transactions remain well above pre-coronavirus levels of 19.8%.

Sales at supermarkets and other food outlets fell 0.8% in August, leaving them 1.4% below their pre-pandemic levels in February 2020.

Gasoline and diesel sales fell 1.7% despite lower prices.

Department store sales fell 2.7%, while housewares stores fell 1.1%, mainly due to declines in furniture and lighting stores.

Feedback from retailers suggested consumers were cutting back on spending after a sharp price increase.

In contrast, sales of alcohol and tobacco increased by 6.3%.

“Buyers are simply buying less to compensate for price increases,” said Lisa Hooker, consumer markets sector leader at PwC. She said it was a concern for retailers as the crucial Christmas shopping season approaches.

For the first time, grocery sales volumes, removing the impact of inflation, have actually fallen below pre-pandemic levels, showing that shoppers are wasting less and are being forced to do pay more attention to what they put in their carts.

She added: “As we approach the critical ‘golden quarter’ in the run up to Christmas, retailers will be eagerly awaiting the outcome of next week’s mini budget.

“Confirmation of an energy price cap and the possibility of tax cuts could boost faltering consumer spending, but businesses will also seek help in mitigating soaring utility costs. This is on top of the inflation in input costs and rising wages they already face.

Sallie R. Loera