Daily Management Review

British retail sales recover in February yet retailers are still uneasy


02/24/2017


Retail sales in the UK partially recovered in February after a sharp drop in January. However, companies in this sector are pessimistic about their prospects, since last year's vote for exit from the EU resulted in a sharp rise in inflation.



Aurelijus Valeiša via flickr
Aurelijus Valeiša via flickr
Retail sales indicator, which is calculated by the Confederation of British Industry (CBI), rose to +9 compared to -8 in January. Last month, retail sales experienced the highest monthly decline since beginning of research in 1983. Analysts surveyed by Reuters forecasted a less significant growth, about zero.

Despite the stronger-than-expected improvement retailers are concerned about rising costs, so they have dramatically raised their prices. "Retailers continue to carefully assess their prospects, expecting a fairly moderate pace of sales growth in next month amid accelerating inflation. This, in turn, could reduce purchasing power of households," - said Ben Jones, an economist at CBI. 

Average sales price rose has been growing at the fastest pace in almost six years, and prices are expected to accelerate in the next month, said CBI. Against this backdrop, companies have reduced their investment plans, while employment has been falling at the fastest pace in two years.

As reported earlier, consumer prices in the UK rose 1.8% in January, inflation peaked at 2.5 years.

Consumers are still experiencing effects of the June referendum. Now their income has also been affected by high inflation rate. Chief Economist at Bank of England Andy Haldane says: "Indeed, the majority of consumers have not yet felt impact of events that occurred during the last six to nine months. But this will soon change, because incomes are declining due to price increases. And then we will see a decline in consumption."

Some analysts believe that inflation in the UK can still grow up to 3% in 2017, given that the Brexit procedure starts in March.

Since consumer spending was one of sources of economic growth in the UK, any slowdown and decline in wages is likely to lead to a further depreciation of the pound sterling and the UK inflation rate, which, in turn, can result in slower economic growth. 

Bank of England said earlier that it will not increase the interest rate unless they see that the inflation rate is not affected by the weak pound sterling. Investors initially expected that inflation will rise to 1.9% year on year, so that the Bank of England will probably have to tighten monetary policy of the United Kingdom.

Citi said earlier that longer-term inflation expectations for the next 5-10 years rose to 3.2 percent from 3.0 percent in January. This is the highest rate since January 2014, but it is still below the average for the entire time of the study (since 2005). "We cannot rule out the second effect, when households and companies will negotiate on wages and rents, which will consolidate the inflation rate for the current surge, - said Citi’s economists. - If the economy does not slow down in the coming quarters, the Bank of England may be at pressure to raise interest rates from the current low of 0.25 per cent, despite the uncertainty about Brexit".

source: marketwatch.com, reuters.com






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