UK retail sales exhibited surprising growth in August, defying expectations and bringing attention to the nation’s economic landscape amidst rising concerns of stagflation. These headline sales were up 0.7% YoY, beating the 0.6% expected. This growth is happening amid a backdrop of mixed economic signals, including an increase in unemployment and record net –£267 billion borrowing.
ONS also restated July’s headline sales figures. They bumped the figures back from 1.1% to 0.8%, revealing weaker-than-expected performance. Comparing the July and August results paints a very positive picture. Analysts and economists are keenly observing to see how, or if, these trends will affect the Bank of England’s future monetary policy.
Economic Indicators Shift
Despite the positive momentum depicted by retail sales figures, other economic indicators suggest a different story. The UK’s unemployment rate increased to 4.7%, one of many signs of a weakening labor market. Unemployment continues to increase. At the same time, payrolled jobs are down, raising fears over worker tenure and overall economic health moving into the next several months.
UK net borrowing soared to £18 billion in August. This figure is well above the predicted £12.8 billion and is the highest borrowing for the month in five years. This unprecedented surge in borrowing after over a decade of new fiscal pressures has increased doubts on how sustainable and lasting government spending is.
UK gilt yields have surged up to 4.7%, a two-week high. This increase is a result of increasing investor sentiment concerns for inflation and interest rate increases. Policymakers are confronted with a spate of new hurdles as these high yields continue to climb. These growing levels of borrowing obfuscate the broader economic picture.
Retail Sales Performance
Even with continuing fears over the economic climate, UK retail sales for August came in way beyond expectations to surprise analysts and beat all expectations. The core retail sales year-on-year reading came in at 1.2%. This beat expectations of 0.8% and just nudged over July’s revised number of 1.0%. This strong performance paints a picture of the resilience of consumer spending, despite continuing upward pressure on inflation.
The month-on-month figures were just as encouraging — core retail sales excluding fuel soared by 0.8%, well ahead of the expected 0.3%. Despite the challenging economy, consumers are still voting with their wallets, demonstrating their desire to spend. This newfound thrift is positively impacting the retail ecosystem.
The surprise jump in retail sales provides a rare ray of optimism for the UK economy. It is not out of the woods yet, with inflation still high at 3.8% YoY, almost double the BoE’s target of 2%. The resilience shown so far by consumers should serve as a reminder for policymakers to carefully weigh their next steps in the face of these macroeconomic headwinds.
The Bank of England’s Response
The Bank of England is now more independent and centres on achieving price stability. This includes keeping the economy in balance, which requires low and stable inflation of about 2%. With inflation now at 3.8%, the Fed is rightly in a hard place trying to keep the economy humming while fighting the good fight against inflation.
Retail sales have been outpacing expectations with high growth. Policymakers are in a difficult position, caught between the benefits of supporting consumer spending and the compelling need to bring down inflation. Further central bank decisions will depend on forthcoming economic data, including inflation. Employment trends and inflation benchmarks are just two of several considerations that will inform its ongoing mission to restore balance.