Recent United Kingdom economic data tell a somewhat mixed story. Today, the country is in the grip of high inflation and staring down the barrel of stagflation. In August, the UK surprised with headline sales rising 0.7% y-o-y (expected 0.6% y-o-y), breaking expectations. Even as this is great news, the economy slowed down from a revised 0.8% in July, which worries many about what’s happening underneath the surface.
To compound those concerns, unemployment claims moved closer to 4.7%, and payrolled employment fell. The highest goal of the Bank of England is price stability, defined by a target inflation rate of 2%. It is under serious constraint, given that inflation is at 3.8% y/y right now. Stagflation has hit the UK economy according to key indicators. This is a recipe for us to suffer from inflationary growth—rising prices and no economic growth.
Retail Sales Performance
After more recent doom and gloom reports, UK retail sales in August surprised with a 0.7% year-on-year increase, pointing to still-resilient consumers. This quarter’s 0.8% performance exceeded the consensus forecast of 0.6%, a sign that consumer spending is staying relatively healthy in the face of numerous economic headwinds. That jump is a tenth of point less than July’s revised 0.8% percent figure, indicating that consumer confidence may be slowing down a bit.
The headline core retail sales figure for August was encouraging as well, with a 1.2% year-on-year gain. This was an impressive improvement from July’s downwardly revised 1.0%, showing a much healthier consumer spending trend in the absence of volatile fuel sales. On top of this, retail sales excluding fuel rose by a stronger-than-expected 0.8% month-on-month. Of significance, this number comes in at double the revised 0.4% recorded in July, an indication of improving consumer performance across all sectors aside from fuel.
These findings highlight the tough environment retailers are operating in as they continue to adapt to shifts in consumer shopping patterns and ongoing economic headwinds. We see our retail sector as a vital partner in leading our City’s economic recovery. Inflation could threaten its sustainability by putting pressure on households’ disposable incomes.
Employment and Borrowing Trends
The employment picture is a different story as the UK only has an official unemployment rate of 4.7%. Though this figure still represents a small trend toward higher unemployment, it is alarming as it signals growing risk of job losses across sectors. The latest data indicate a drop in payrolled jobs. This continued trend is an alarming signal that employers are backing off from aggressive new hiring plans amid an uncertain economic outlook.
UK net borrowing in August shot up to £18 billion. That increase represents the greatest amount measured for that month in five years. This sudden increase raises critical questions regarding the government’s fiscal approach. It undermines public spending and investment in future growth efforts. As we do everything we can to support the economy through this crisis, borrowing has spiked tremendously. At the same time, we’re working to combat inflation and other external pressures.
The federal government is on an unsustainable fiscal path. Therefore, it needs to strike the right balance between providing adequate support for economic recovery and maintaining long-term financial stability.
Market Reactions and Future Outlook
In reaction to all of these strong economic signals, UK 10-year gilt yields rose to 4.7%. The increase is a harbinger of even higher borrowing costs for the federal government. It further indicates that investors are increasingly concerned about inflation and future economic growth prospects. The high climbing yields demonstrate the nervousness of investors. Most importantly, they are focused on the potentially positive relationship between high inflation rates and strong economic performance.
The Bank of England’s independence to pursue price stability is very much needed in this time of uncertainty. With inflation rates now regularly exceeding the Fed’s 2% target, interest rate setting and monetary policy have become a real conundrum for policymakers. Moreover, general year-on-year inflation rate has gone up to 3.8%. This price backtrack is causing consumers to continue to feel the squeeze, and will likely cut into consumer spending and growth over the next few months.
Market participants and analysts alike are watching the rapid developments with vigilant interest. They’re especially interested in learning how these indicators will affect future monetary policy decisions and consumer confidence.