UK retail sales in biggest drop in almost five years
UK retail sales suffered their biggest drop since April 2012 last month, in a sign that consumers might finally be paring back after their post-Brexit vote splurge.
Official data showed retail sales volumes fell 1.9 per cent year-on-year in December, widely missing economists’ forecasts in a Reuters poll for a 0.1 per cent decline. The weakness of the official figure also contrasted with positive trading updates issued by some of the biggest high street names in recent weeks.
Retail sales account for around 20 per cent of GDP and household consumption has held up much better than many economists expected in the wake of the June referendum. Strong consumption was the reason the economy grew by 0.6 per cent in the third quarter of the year.
“The sharp decline in retail sales in December is the first sign that rising inflation and slowing job gains are forcing shoppers to curb their consumption,” said Samuel Tombs of Pantheon.
Mr Tombs also suggested that the reason for the initial surge in consumption after the Brexit vote might have been because shoppers wanted to complete their purchases before inflation started to hit the shops in the wake of the slump in the pound since last June. Other economists also predicted a consumer
slowdown.
“We expect real consumption growth to slow from an average rate of 2.6 per cent year-on-year in 2015 and 2016 to 1.7 per cent in 2017 and 2018 as real wage gains are eroded by rising inflation. Slowing job gains now that the labour market has reached full employment could further reduce demand momentum,” said Kallum Pickering of Berenberg.
The Office for National Statistics (ONS) reported that the largest contribution to the monthly fall in sales was from non-food stores. On a three month on three month basis sales volumes still rose by 1.2 per cent, meaning retail will have made a positive contribution to overall GDP growth in the final quarter of 2016.
Sterling is down around 20 per cent against the dollar since last Summer, and UK firms have warned they will pass on their higher import costs to domestic prices. Average store prices increased by 0.9 per cent in the year to December, with prices in fuel stores up by 9.7 per cent and 1 per cent in textile, clothing and footwear stores.
Retail prices were still in deflation as recently as October. Overall consumer price inflation rose to 1.6 per cent in December, the ONS reported earlier this week, the highest since July 2014.
Economists expect the rate to jump well above the Bank of England’s official 2 per cent target by the end of the year, squeezing real wages and households’ inflation-adjusted disposable incomes.