Pound sinks to lowest level since 1985 as high street sales slump
THE pound slumped below $1.14 for the first time since 1985 after a fall in retail sales fuelled fears that the UK is hurtling toward a recession.
Sales fell 1.6pc in August compared with the previous month, Office for National Statistics (ONS) data revealed, the biggest decline this year and more than three times the drop forecast by economists. This sent the pound down 1pc against the dollar, falling below $1.14 for the first time in 37 years.
It comes on the 30th anniversary of Black Wednesday, when a collapse in the pound forced Britain to withdraw from the Exchange Rate Mechanism.
Olivia Cross, economist at Capital Economics, said the figures suggested “that the downward momentum is gathering speed”, supporting the view that “the economy is already in recession”. Economists polled by Reuters had predicted a much gentler drop in retail volumes of 0.5pc. The volume of retail sales fell across all sectors for the first time since July last year, with large decreases in department stores where sales fell 2.7pc, while fuel declined by 1.8pc.
The ONS said “rising prices and cost of living” was affecting sales volumes.
On an annual basis, retail volumes fell 5.4pc in August, from 3.2pc in July – defying market predictions of a 3.7pc drop. Consumer confidence in the economy hit record lows last month, figures that could cause the Bank of England’s Monetary Policy Committee to consider a 0.5 percentage point increase in interest rates next week rather than the 0.75 percentage point rise expected by markets.
The Government’s energy support package will provide some relief for consumers next month, but separate data published by the ONS yesterday showed that around half of adults who pay energy bills are already struggling to afford them. Four in five people also said in the past two weeks they were worried about rising costs, as inflation batters real incomes.
For the first time since December last year, the value spent on retail goods also fell month by month, dropping 1.6pc – the largest decrease since July 2021. High inflation means consumers are spending more to buy less. While volumes were down by 5.4pc in August year on year, this was mirrored by a rise of the same figure in value.
The highest increase in expenditure was on fuel, with households spending 21pc more than in August, while the outlay on groceries rose by 6pc, despite volumes being 4.5pc lower year on year.
Martin Beck, chief economic adviser to the EY Item Club, said he expected the downturn that retailers currently find themselves in to persist into 2023. He said: “Real household incomes are still on course for a significant fall over the next 12 months or so.
“And with unemployment likely to rise, if modestly by the standards of past downturns, and the geopolitical outlook also full of uncertainties, confidence is unlikely to see much of a revival”.
However, Pantheon Macroeconomics said it expected August’s retail sales figures to be “this year’s nadir and a consumer-led recession to be narrowly avoided this winter”.
It said this was owing to the Government’s decision to freeze energy costs at 27pc above their current levels, which it expects to boost consumer confidence.