According to a survey conducted on behalf of the Confederation of British Industry (CBI), retail sales on British high streets saw their worst rate decline in eight years in October. As more than two thirds of GDP is made up from domestic consumption, this is a worrying observation. The decline is the worst seen since the height of the Global Financial Crisis.
The sharp decline in consumer spending has been seen as evidence that consumers are feeling the double pinch of higher price inflation and below inflation wage increases which erode buying power. Disposable income has declined in five of the past six months (and has a cumulative effect, of course). It is also seen in some quarters as an effect of the uncertainty caused by Brexit, but this is probably to overplay the data since the vast majority of the public have yet to register any deep concerns over their Brexit vote. The most recent Brexit survey (14/10/17) showed 42% of voters supportive of Brexit with 47% against it. Whilst this shows a clear shift in opinion since the vote, the margin of the swing is too small to infer much from. Business confidence, is a different matter, of course.
The October slump in high street sales was seen particularly in department stores, specialist food and drink businesses. According to the survey, half of respondents reported falling sales in October whereas 15% said that sales had picked up, leaving a net decline of 36% of businesses reporting a contraction; the worst performance since March 2009. The survey revealed that orders placed by high street stores with suppliers have also declined at the fastest rate since the spring of 2009.
Commenting on the survey, Rain Newton-Smith, the CBI’s chief accountant noted: “It’s clear retailers are beginning to really feel the pinch from higher inflation. While retail sales can be volatile from month to month, the steep drop in sales in October echoes other recent data pointing to a marked softening in consumer demand.”
The CBI survey highlights the complexity of the decision facing the Bank of England, this week when it meets to decide on UK interest rates. Whilst a higher base interest rate would boost the Pound somewhat (much of this may already be priced-in) and reduce inflationary pressures, it would also increase the costs of consumer and mortgage borrowing which could exacerbate the decline in consumer spending as households tighten their belts.