Pound falls as weak retail sales raise fears UK economy is in recession | Economics

The pound sank to a new 37-year low against the dollar on Friday after weaker-than-expected retail sales sparked fears the British economy is already in recession.

Sterling fell more than 1% against the currency to $1.1351, its lowest level since 1985, partly reflecting further dollar strength as well as specific concerns about Britain’s prospects. The pound also hit a 17-month low against the euro, with 1 euro worth 87.66 pence.

It came as the latest official data showed cash-strapped consumers cut spending more than expected in August, when UK retail sales volumes fell 1.6%. Economists had forecast a more modest drop of 0.5%.

The sharp drop in sales came after an upwardly revised 0.4% rise in July that appears to be a temporary recovery after the Queen’s platinum jubilee celebrations in June.

The drop in sales last month was widespread, with gas stations, supermarkets, clothing and furniture stores experiencing a drop, the Office for National Statistics said.

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The last time this happened was in July 2021 when all legal Covid restrictions on hospitality were lifted and people headed to bars and restaurants.

The ONS said “rising prices and the cost of living” were hitting retail sales in Britain, and economists warned there were signs of an economy already in recession.

Olivia Cross, economist at consultancy Capital Economic SciencesHe said that while he expected the UK recession to be shorter and milder after the government’s £150bn energy price freeze plan, all indicators showed an economic contraction had already started.

She said: “The 1.6% drop in retail sales volumes in August supports our view that the economy is already in a recession. Retail sales are likely to continue to struggle as the cost of living crisis hits harder in the coming months. But nonetheless, the Bank of England will still have to raise interest rates aggressively.”

Capital Economics said the extra £150bn pumped into the economy will force the Bank to add another percentage point to interest rates from its previous estimate, meaning it expects the Bank’s base rate to jump from the current level of the 1.75% to 4%, adding more pain for those with mortgages.

Martin Beck, the chief economic adviser at EY Item Club, said: “Real household income is still on track for a significant drop in the next 12 months or so. And with unemployment likely to rise, albeit modestly by the standards of past recessions, and the geopolitical outlook also fraught with uncertainty, confidence is unlikely to see much of a resurgence.

“So the recession retailers are currently in is likely to persist for the rest of this year and into 2023.”

To emphasize the extent of the recession, online sales fell to 25.7% of all sales in August 2022 from 26.3% in July 2022; although transactions via the web remain significantly above pre-coronavirus levels of 19.8%.

Sales at supermarkets and other grocery stores fell 0.8% in August, leaving them 1.4% below their pre-pandemic levels in February 2020.

Gasoline and diesel sales fell 1.7% despite falling prices.

Sales at department stores fell 2.7%, while home goods stores fell 1.1%, mainly due to declines in furniture and lighting stores.

Comments from retailers suggested consumers were cutting back on spending after a big spike in prices.

However, sales of alcohol and tobacco increased by 6.3%.

“Buyers are simply buying less to make up for price increasesaid Lisa Hooker, industry leader for consumer markets at PwC. She said this was a concern for retailers as they approached the crucial Christmas shopping period.

For the first time, grocery sales volumes, stripping out the impact of inflation, actually fell below pre-pandemic levels, showing shoppers are wasting less and being forced to be more careful what they eat. that they put in their cars.

He added: “As we head into the critical ‘golden quarter’ in the run-up to Christmas, retailers will be watching with anticipation for next week’s mini-budget outcome.

“The confirmation of an energy price cap and the possibility of tax cuts may boost faltering consumer spending, but businesses will also seek help to ease their own utility costs. That’s on top of input cost inflation and wage increases they’re already having to deal with.”

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