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

The pound sank to a fresh 37-year low against the dollar on Friday after weaker-than-expected retail sales fueled fears that the British economy is already in recession.

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

It came as the latest official data showed that cash-strapped consumers cut spending more than expected in August, as UK retail sales volumes fell by 1.6%. Economists had predicted a more modest fall of 0.5 percent.

The sharp drop in sales followed an upwardly revised 0.4% increase in July which appears to be a temporary setback following the Queen’s platinum jubilee celebrations in June.

The fall in sales last month was broad-based, with petrol stations, supermarkets, clothing and furniture stores all experiencing a fall, 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 went out to bars and restaurants.

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

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

She said: “The 1.6% fall in retail sales volumes in August supports 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. However, the Bank of England will still had to raise interest rates aggressively.”

Capital Economics said the extra £150bn injected into the economy would force the bank to add another percentage point to rates from its previous estimate, meaning it expects the bank’s base rate to jump from its current level of 1.75% to 4% , and adds. more pain for those with mortgages.

Martin Beck, chief economic adviser for EY Item Club, said: “Real household incomes remain on course for a significant fall over the next 12 months or so. And with unemployment likely to rise, albeit modestly by the standards of previous recessions, and the geopolitical outlook also fraught with uncertainty, confidence is unlikely to see much of a revival.

“So the recession that retailers are currently in is likely to persist through the rest of this year and into 2023.”

Underscoring the extent of the decline, online sales fell to 25.7% of all sales in August 2022 from 26.3% in July 2022; although online transactions are still significantly above pre-coronavirus levels of 19.8%.

Sales at supermarkets and other grocery stores fell 0.8% in August, making them 1.4% below the pre-pandemic level of February 2020.

Petrol and diesel sales fell 1.7% despite the price drop.

Sales in department stores fell by 2.7%, while household stores were down 1.1%, mainly due to declines in furniture and lighting stores.

Feedback from retailers suggested that consumers were cutting back on spending after a broad-based price increase.

However, sales of alcohol and tobacco rose by 6.3%.

“Shoppers are simply buying less to compensate for price increases,” said Lisa Hooker, industry leader for consumer markets at PwC. She said this was a concern for retailers as they approached the crucial Christmas shopping period.

For the first time, grocery sales volumes, after stripping out the impact of inflation, actually fell below pre-pandemic levels, showing shoppers are throwing away less and being forced to be more careful about what they put in their trolleys.

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

“The confirmation of an energy price cap and the possibility of tax cuts could boost faltering consumer spending, but businesses will also be looking for help to alleviate skyrocketing electricity costs. This is in addition to the price increase and wage increases that they already have to contend with.”

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