UK retail sales weaker than forecast, adding to BoE doubts

Oliver Haill WebFG News | 19 Oct, 2017 09:44 - Updated: 11:39 | | |

dixons_carphone_3d_tv_retail_tech

UK retail sales fell more than expected last month, official figures confirmed on Thursday, further muddying the waters over whether the Bank of England will hike interest rates next month.

Total retail sales fell 0.8% in September compared to the preceding month, much worse than the 0.1% consensus forecast and the figure for August, which was revised to growth of 0.9%.

Compared to last year, sales were up only 1.2%, almost half the expected 2.1% and down from a revised 2.3% for the previous month.

Excluding petrol sales, retail revenues were down 0.7% in September compared to a month earlier, versus a consensus estimate for a 0.2% decline and a revised prior month's sales growth of 0.9%.

Year-on-year, sales excluding auto fuel increased 1.6%, compared to the 2.2% expected by the market and the revised 2.6% for August.

Although September’s monthly retail sales reversed August’s growth, there was a continuation of the underlying trend of steady growth in sales volumes, said ONS senior statistician Kate Davies, following a weak start to the year, and a background of generally rising prices.

Retail sales volumes fell by 0.8% in September, with non-food sales volumes the main culprit, down 0.6% on the month - although on the year were up 1.2%.

The value of retail sales rose by 4.4% year on year reflecting price inflation.

Annual shop price inflation rose to 3.3% in September, up from 3.1% in August and 2.7% in July to the highest level since March 2012.

With economists having expected a smaller fall in retail sales, the pound was sent down around 0.3% against the dollar to 1.3168 and almost 0.7% against the euro to 1.1127, with Brexit concerns also weighing.

Analyst Laith Khalaf at Hargreaves Lansdown said the figures showed evidence of consumer belt tightening, with discretionary spending taking a particularly big hit, as shoppers prioritise more essential items as prices rise.

"This has given the pound a bit of a bloody nose on the currency markets, with investors scaling back their expectations of a rate rise from the Bank of England.

"Despite the drop in retail sales, it would be unwise to peg a consumer slowdown on one month’s figures alone, which can be affected by random events like the weather, or a big sporting event on the telly."

Taking a longer term view, Khalaf said the UK consumer has actually been relatively resilient to rising inflation and weak wage growth, and retail sales volumes are still ahead of where they were last year despite these headwinds.

"These latest figures will however give the Bank of England further food for thought when it comes to their impending decision on interest rates. Indeed, a nasty case of indigestion is probably warranted.

"The Bank doesn’t want to apply the brakes to consumer spending if it is slowing down of its own accord already, though it does want to curb inflation and the glut in consumer borrowing. On top of that the Bank could well find its credibility compromised if it fails to follow through on its recent hawkish commentary, and would once again be on the hook for providing 'forward misguidance'."

Howard Archer, chief economic advisor to the EY ITEM Club, agreed that the soft September retail sales data "casts further doubt" on whether the BoE will follow through on recent hawkish comments and deliver an interest rate hike to 0.50% on 2 November after the MPC meeting.

"We believe a hike is just about more likely than not, but it is looking an increasingly close call."

With real income growth in negative territory, he said the outlook for consumers will remain highly challenging over the final months of 2017 but should gradually improve as 2018 progresses.

Inflation looks likely to hover at 3% or just above for the rest of 2017, he noted, with earnings growth showing little sign of picking up despite the unemployment rate coming down to 4.3%.

“Moreover, consumer confidence is relatively fragile with considerable caution over making major purchases. Consumers may also be worried by indications that the BoE may well raise interest rates as soon as November. Significantly, there are signs that consumers are now reining in their borrowing. Meanwhile, lenders are becoming more reluctant to provide unsecured credit to consumers."

The MPC's has good reasons to both hike and hold interest rates, as explained Manuel Ortiz-Olave, market analyst at Monex Europe.

"Today’s figures highlight an awkward reality for the Bank of England, with reasons to both hike and hold.

"On one side, inflation is eating consumer’s purchasing power, and in the other side, activity is slowing down in the retail sector.

"A hike would help control inflation, but would further ease demand in the retail sector, whereas keeping rates on hold would favour demand, but could see inflation rising above the BoE’s 3.0% maximum estimate of inflation.

"And as today’s data shows, inflation is already starting to take its toll. The amount of pounds spent has increased in all sectors over the last 12 months, but volumes have either fallen (food sector), or increased marginally (textile or household goods."

More news

16:33 Eurozone consumer confidence jumps in November

Consumer confidence in the single currency bloc shot higher in November, according to the executive arm of the European Union.

16:24 Thursday preview: UK GDP, ECB minutes, results from Centrica, Cineworld, Severn Trent

Thursday's market volumes will be thinner as the US gets fatter on Thanksgiving, while the UK chews over the second reading for gross domestic product and likely further analysis of the Chancellor's Budget, while corporate results include Centrica, Severn Trent and Cineworld.

15:52 Budget: New tax breaks aim to revive North Sea oil and gas producers

Chancellor Philip Hammond has announced new tax breaks to encourage investment in North Sea oil and gas producers.

15:47 Budget: Hammond targets first-time buyers as growth forecasts are cut

Philip Hammond scrapped stamp duty on almost all first-time property purchases as he sought to inject good news into his Budget after a series of cuts to the outlook for the economy.

15:38 Treasury facing £300m phone bill after mobile network court challenge

The Treasury was facing the prospect of a rather expensive mobile phone bill on Wednesday, after a £300m appeal against a significant increase in annual license fees was upheld.

15:30 Gfinity losses widen as it invests in product

Esports entertainment business Gfinity saw revenue increase 64% to £2.37m in the year to 30 June, it reported on Wednesday, with its loss before tax widening to £5.3m from £3.1m.

15:25 Rambler installs Scott Britton as manager at Ming Mine

Rambler Metals and Mining announced the appointment of Scott Britton as its new general manager at the Ming Copper-Gold Mine in Baie Verte, Newfoundland and Labrador, Canada on Wednesday.

15:20 Ferrum Crescent granted three-year extension at Toral

Europe-focussed lead-zinc explorer Ferrum Crescent announced on Wednesday that, following a formal application to the Director-General of Mines of the Province of Leόn, its exploration licence on the Toral lead-zinc project has been renewed for a further three-year term to November 2020.

15:16 Totally acquisition Vocare wins contract extension with NHS Vale of York

Out-of-hospital services provider Totally has been awarded a two year contract extension ‘in-principle’ to 31 March 2020 with NHS Vale of York Clinical Commissioning Group, it announced on Wednesday.

15:30 Budget: Chancellor unveils stamp duty cut, housebuilder's planning probe

A range of new housing policies were proposed by Chancellor Philip Hammond in his Budget statement, including more funds for smaller housebuilder, a probe into potential holding of land by major housebuilders and a stamp duty cut for first-time buyers.