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UK retail sector in crisis as consumers face disposable income 'recession' on Brexit woes

The Bank of England expects inflation to exceed 3% in autumn as the pound continues to be weighed by down Brexit worries
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Retailers hit by weak consumer confidence as inflation rises

UK retail sales could come under further pressure in coming months as analysts expect the squeeze on household spending to worsen in the face of Brexit uncertainty.

Consumers have been tightening the purse strings as they feel the pinch from rising inflation and falling real wages.

Retail sales volumes fell 1.2% in May compared to the previous month, worse than the 1.0% decline forecast by economists, the Office for National Statistics revealed today.

Compared to the same month a year ago, sales rose just 0.9% in May, well below estimates for 1.6% growth.

DFS, Next and M&S hit by retail sales slump....

Furniture retailers were among the worst hit as consumers spent their earnings on essential items and food.  DFS Furniture reinforced the challenges the industry faces this morning as it issued a profit warning, blaming an “uncertain macro-economic environment” for weaker-than-expected trading.

Clothing retailer Next plc (LON:NXT), which last month cut its full year guidance after reporting a drop in first quarter sales, has also been hit by a slump in consumer spending.  Chief executive Simon Wolfson has blamed the company’s shrinking profits on a drop in disposal incomes, which means less people are spending money on clothing.

Marks & Spencer Group plc’s (LON:MKS)  already struggling womenswear division has suffered further at the hands of a tough retail environment. Last month it reported a decline in full year profits, as clothing and homeware sales fell.  

Shraes in DFS, Next and M&S were all in the red after the disappointing retail sales data.

Brexit-fuelled inflation and drop in real wages a drag on consumers…

A weaker pound after the UK voted to leave the European Union last June has pushed inflation higher and weighed on disposable incomes.  The ONS revealed on Tuesday that inflation unexpectedly rose an annualised 2.9% in May, well above the Bank of England’s 2.0% target and compared to 2.7% in April.

Confirming the burden on household incomes, the ONS on Wednesday said average earnings fell 0.6% in real terms in the three months to April, compared to the same period a year earlier.

Excluding inflation, average weekly earnings rose 2.1% year-on-year during the quarter but missed forecasts for a 2.4% increase and marked a slowdown from the 2.3% growth seen in the previous three months.

Deep recession in disposal incomes likely, says Liberum…

Liberum said it expects a “deeper and longer” disposable income “recession” for consumers in the second half of the year.

“A surprise increase in inflation and weaker than expected wage growth amplified the pressure on household cash flow in May,” it said.

“We see negative year on year growth as imminent and we don’t expect this to subside until early 2018; given a more sustained period of inflation and weaker prospects for wage growth.”

Meanwhile, the shock result of last Friday’s general election has made Brexit even more unclear, sending the pound further into the red.

Theresa May’s shock election losses add to uncertainty..,

Theresa May’s plans to secure a larger majority in the House of Commons backfired as she lost seats to Labour in the general election, leading to a hung parliament.

The Prime Minister is now seeking support from Northern Ireland’s Democratic Unionist Party to form a government, which may change the course of Brexit and delay negotiations that were due to begin next week.

Such uncertainty will only continue to weigh on sterling with inflation expected to reach 3% in coming months.  

Chris Williamson, chief business economist at IHS Markit, said: “The squeeze on household budgets is likely to get worse before it gets better. Inflation could well breach 3% in coming months but there’s little prospect of pay growth picking up.

“Inflation should start to cool later in the year, taking some of the pressure off, but this looks like it’s going to be a tough year as a whole for households. The economy will inevitably suffer as a consequence.”

Another worry is that companies could pull back on investment and hiring due to the heightened uncertainty, Williamson added. He argued that it might not be the best time for the Bank of England to hike interest rates.

Bank of England expects inflation to top 3%...

The Bank came its closest to voting for an interest rate increase since 2007 after three policymakers backed an increase today. External Monetary Policy Committee members, Ian McCafferty and Michael Saunders, joined well-known hawk Kristin Forbes in voting for a rate rise to protect the pound. The BoE said it expects inflation to exceed 3% this autumn.

Bank of England Governor Mark Carney and four other policymakers voted to leave rates unchanged at 0.25%.

Nick Dixon, investment director at Aegon, said: “The high inflationary environment has not been enough to force Carney’s hand on interest rates, but in the shadow of monetary normalisation in the US, pressure is mounting for the Monetary Policy Committee to follow suit.

“Slowing wage growth and increasing cost pressures are also starting to take their toll on workers in every sector and, in an economy highly reliant on consumer spending, the Bank of England will be keen to keep inflation at manageable levels.”

FXTM research analyst, Lukman Otunuga, said the spike in inflation and subdued wage growth has created “further headaches” for the BoE.

“Although raising interest rates to cool inflation is seen as a practical strategy, it may simply end up pressuring borrowers ultimately eroding business confidence and pinching consumers further,” Otunuga said.

Pound faces further weakness….

The analyst added that sterling remains gripped by political uncertainty and Brexit woes.  He said sterling bears “could be instilled with enough inspiration to send the GBPUSD towards 1.2600” following the recent slate of negative economic data.

On a more positive note, the BoE said it expects a weaker pound will support exports and offset lacklustre consumer spending.

The pound jumped 0.25% to US$1.2783 on the comments and on the prospect that the Bank may be nearing a rate rise.

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