On Friday, the British pound dropped to its lowest level. It rounded out a disastrous week, setting itself up to be the worst performing G10 currency on the foreign exchange market. As a result of this slump, UK consumer spending is certainly still one of the main pillars buoying the economy. Second, we have recently released data indicating a 1.7% uptick in non-food retail sales. In contrast, food sales increased by 0.7%, and fuel sales increased by an outstanding 2.8%. The bottom line on overall sales excluding fuel in June was underwhelming in a big way—only a 0.6% monthly gain.
With the dollar’s strength this quarter, the pound faces an added hurdle. Consequently, the pound has fallen to be the second weakest currency against its G10 counterparts. With economic uncertainty on the horizon, businesses in the UK are dealing with a growing number of pressures, from ballooning costs of labor to changing consumer confidence. This perfect storm has led many retail sales analysts to doubt the sustainability of the retail sales growth we are currently seeing.
Retail Sales Performance
Today’s official retail sales figures from the Office for National Statistics showed UK retail sales unexpectedly surged in June. That could be an indicator of a broader, long-term change in consumer behavior. Non-food retail sales have increased by 1.7%, signalling high demand. That’s a sign that consumers are still willing to spend even when the economic squeeze is growing more pronounced. This growth is all the more impressive. This happens against the backdrop of an increasingly weak pound and even higher inflation rates.
Food sales were a major driving force in the positive turn, showing a 0.7% increase over the month for June. Food expenditure increased. Food supply is one factor bolstering the bottom line. Seasonal demand coupled with consumers’ ever-rising demand for home dining experiences is contributing to this trend. Sales of diesel and unleaded fuel rose an impressive 2.8%, undoubtedly fueled by an upswing in travel demand as the world opens up again.
When taking fuel out of the equation, total sales growth was below market estimates, increasing just 0.6%. This difference is a sign of how choosy consumer spending is. It makes it hard to argue that this pace of retail growth is sustainable in the months ahead.
Economic Environment and Currency Performance
With the pound flailing against its G10 peers, economic uncertainty continues to be a pressing topic for traders and business leaders. Already, analysts are calling it the strongest quarter ever for the dollar. This overall trend creates negative downward pressure on the pound and makes it much harder for UK companies to compete in international trade.
After recent hawkish reports, analysts put the probability of a rate hike this October at 40%. That’s a much larger leap than the 25% a few days ago. This is encouraging news as it suggests the Bank of England will act to counter inflationary pressures and improve economic stability. Today, the interest rate futures market is predicting just a 15% chance of a rate cut in September. That suggests that the market is looking for any shift in monetary policy to be done gingerly.
The euro’s performance this week has been notably strong, further emphasizing the pound’s position as one of the weaker currencies in the G10 landscape. Analysts fear that this double whammy will hit UK exporters hard and represents a nasty shock to the UK’s broader economic growth.
Challenges Facing UK Businesses
Though retail sales are up pleasantly in some categories, the economic picture is decidedly more ominous. Companies throughout the UK are struggling with increasing costs of work. This new reality poses incredible barriers for businesses with a workforce size of ten or greater. The rapidly rising costs of recruitment and retention for employees have caused many firms to look back inwards at how they operate.
Economic uncertainty remains the single biggest challenge facing trades businesses in July. Factors such as changing consumer behavior, inflationary pressures, and global supply chain disruptions have created an unpredictable environment for retailers. Join the storm. As multinationals head into treacherous waters, many firms are responding by taking a much more conservative approach to managing inventory and pursuing pricing strategies.