Though the initial growth figures for 2017 show signs of revival for the UK economy, a weaker sterling and higher inflation are expected to dent it, claim economists. According to PricewaterhouseCoopers LLP (PwC), UK’s consumer spending growth will weaken in the years to come after slipping to about 2 per cent this year from 3 per cent in 2016. The food and clothing sectors that are heavily reliant on exports are going to be the most exposed to the pound’s 18 per cent drop against the dollar since Britain’s vote to leave the European Union.
Retail is still integral to Britain’s economy.
According to the news report published by PwC, spending which accounts for more than two-third of UK gross domestic product, will slow further to 1.7 per cent in 2017 as income gains fail to keep up with the inflation. It further forecasts that the housing and utility spending could account for just under 30 per cent of household budgets by 2030, up from about 25 per cent last year, forcing Britons to cut back on non-essentials. “Increased borrowing may help fill the gap in the short term, but there are limits to how far UK consumers can continue to live beyond their means with expenditure rising faster than their disposable incomes. We, therefore, expect consumer spending growth to moderate over the next couple of years as higher inflation and Brexit-related uncertainty start to bite,” reveals John Hawksworth, Chief Economist, PwC.
After confusing most of the economic forecasters last year, UK saw a solid GDP growth of 0.6 per cent in the three months following Brexit and the economy is expected to have grown 0.5 per cent in the final quarter of last year as per Reuters’ poll of economists. During this period, the consumer spending provided the main momentum to UK’s continued growth. But as inflation that is already at a two-and-a-half-year high, is expected to rise further, the support from consumer spending will be harder to maintain. As per the Bank of England, weak pound will lead to an increase in import costs and for some that also will be passed on to consumers, thereby impacting their spending power. Currently, the retail sales figures are already suggesting that the price rise is affecting shoppers as sales volumes suffered their sharpest drop for more than four years in December.
The recent surveys and reports suggest that the growth in UK’s service sector was at a five-month low in February 2017. As suggested by the Markit/CIPS, purchasing managers’ index (PMI) for services fell to 53.3, down from 54.5 in January, remaining above the 50-threshold demarcating growth from reduction.
Irrespective of various surveys and reports, the UK economy beat expectations in 2016 when Brexit happened, thereby making various companies and market research firms continuously update their figures regarding the growth projection of the country’s economy. Though International Monetary Fund had previously predicted a sharper slowdown, it revised its figures as per UK seeing a growth at 1.5 per cent this year.
Also, pushing this further is the weak currency as pound fell dramatically after the Brexit vote last year, and since then, it has been trading around 15 per cent lower as compared to the dollar and 12 per cent lower compared to the euro than it was before the decision. So retailers in general are among the hardest hit from the falling pound as a majority of them source their products from Asia, for which they pay in dollars. A few currency strategists believe that sterling is likely to remain volatile in the coming months until there is greater clarity about UK’s Brexit deal. This lays further emphasis on the uncertainty surrounding the retail industry, the consumer spending, consumer confidence, savings and household’s disposable income.
Contrary to the above projections and reports, February witnessed stronger than expected retail sales data, which further has helped push sterling to a one month high against the dollar. According to the figures from the Office of National Statistics (ONS), sales volume grew by 1.4 per cent in February, pushing the sterling up by 0.2 per cent against the dollar at US $ 1.25 and up 0.5 per cent against the euro at € 1.16. According to new data from the Centre for Retail Research (CRR) and Rakuten Marketing, 61 per cent of shoppers say they will not be discouraged from purchasing premium items if prices rise by up to 10 per cent, while only 6 per cent say they would refuse to buy the item.
While political negotiations continue, retailers need to be prepared for inconsistency in sterling, rising cost of credit and weak consumer confidence affecting their spending. Nonetheless, retail is still integral to Britain’s economy as it is responsible for 11 per cent of the output and 4.5 million jobs in shops, e-commerce and physical distribution, but for retailers to smoothly see transition post-Brexit, they need to encapsulate strategies that make them more agile, digital, capital-intensive and responsive to change.
