​UK Retail Sales Fall

​Retail sales fell by 1.4% in March, the second consecutive monthly decline, and the primary driver for this was the sharp fall in online spending. This follows news earlier today that consumer confidence has fallen to just one point above its all time low.

With these numbers hitting the headlines, it's quite a challenge to see how UK consumer spending will avoid a downturn over the coming months. Could this prompt the Bank of England to  slow down its rate rises, even with the inflation surpises we keep seeing? Lets take a closer look.

The Cost of Living Squeeze

Fuel prices are up 11% since the start of the year, and household energy bills have increased by an average of 54% this month, with another 30% increase looking likely in October. The consensus is for inflation to peak close to 9% in April but there is potential for it to move into double digits. This is all causing a cost of living squeeze but it doesn't fully explain the recent downtrend in retail sales. It is highly likely that consumers are switching to services after the Omnicron wave.

According to the monthly GDP numbers, the balance between retail and hospitality/recreation spending is now back to pre-virus levels, after a long period of above-average goods demand. If our hypotheis is correct and consumers continue with a preference for services rather than goods, then we are likely to see the cost of living crises showing up more in the retail numbers over the next few months.

Is the UK Heading for a Rescession?

The jury is still out on this one but with increasing interest rates, declining retail sales and falling consumer confidence, it's not too much of a stretch of the imagination for this scenario to play out as the numbers continue south.​

However, around 8% of GDP worth of ‘excess’ household savings has been built up during the pandemic, albeit most of this is concentrated in higher-income earners, and they are less likely to feel the impact of the cost of living squeeze. Payroll data also shows that higher income groups have had a noticeable acceleration in wage growth over the past two years, relative to the two years preceding the pandemic. This is in comparison to those in the lower-income percentiles who have not seen any noticeable acceleration in wage growth. So there is money to spend from the high income earners but aboslutely no guarantees that they will! 

The Consumer Outlook

According to the Bank of England, the near-term outlook for rate hikes heavily depends on whether the consumer outlook turns rapidly over the next few weeks, or whether any fall in spending is more gradual. One view is that a sharp deterioration in growth conditions could help to ‘short-circuit’ the ratchet higher in prices being set by companies.

The jury is still out but we could see the BoE hike interest rates a few more times before pasuing over the summer months.