shoppers return but retail pressures rise 2689452017

Britain’s latest retail sales figures have lately been attracting greater attention than has been the case for a number of years and it’s no mystery why.

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By :  ,  Financial Analyst

When the going gets tough…

Britain’s retail sales figures have lately been attracting greater attention than has been the case for a number of years and it’s no mystery why.

Thursday’s update, though,  including annual, monthly and three-month year-to-year readings were a reassuring surprise, given that—apart from the latter category—sales rose. This shows that the return of inflation, seen in data out earlier in the week, has not proved to be as much of a disincentive for shoppers as feared.

This matters, because consumption has been the biggest driver of the economic advance that followed the Brexit vote. Retail sales rose 1.4% in February, compared with economists’ forecasts of 0.4% rise. On the year, growth quickened from 1% in January to 3.7%.

Even so, whilst the data looked positive from monthly and yearly perspectives, subtler readings were less promising. Year-to-year growth during the 3-months to February, at 3.1%, was actually the slowest since 2014. This is a reminder that whilst January’s pause was just that—and quite typical after a Christmas splurge—finer measures of growth reveal that activity is decelerating.

An even more granular view of the three months to February as a whole, down by 1.4% after a 0.5% decline in three months to January, shows the biggest fall since March 2010. A drag on overall first-quarter economic growth now looks all but certain unless March sees an unprecedentedly large jump in sales.

The Office for National Statistics pinpointed higher fuel prices that have eroded shoppers’ disposable income, as the key source of the softening sales. “The underlying trend suggests that rising petrol prices in particular have had a negative effect on the overall quantity of goods bought over the last three months,” an ONS statistician said on Thursday.


Next Plc. levels on the outlook

It is possible then, that lighter retail sales are a first sign that the threat of inflation, if not inflation itself, is causing shoppers to think twice. It is notable that Thursday also brought results from bellwether Next Plc., one of Britain’s largest clothes retailers, and earnings from Kingfisher, the operator of Britain’s biggest DIY chain, were released earlier in the week. Their reports follow results, over the last couple of weeks, from supermarkets Sainsbury’s and Morrisons. All of these retailers addressed concerns over the potential impact on demand from inflation to a degree, though most kept comments vague, citing uncertainty.

Next however, which vies with Marks & Spencer for the title of Britain’s largest clothing retailer by sales, was more candid. After reporting its first annual profit fall since 2009, it said it was “extremely cautious” about the year ahead. It cited headwinds which in fact encapsulate the risks for many consumer-facing businesses, particularly retailers, as Britain heads into an inflationary environment hot-housed by sterling’s devaluation.

Retailers can expect be see inflationary pressures on their cost bases, from a squeeze in consumer spending as inflation begins to erode real earnings growth, and by price rises on imported goods, due to the devaluation of the pound. The latter pressure will also of course compound any hit to demand, if and when those wholesale price rises are passed on to consumers.

Next’s CEO, Conservative Party grandee Lord Wolfson, a personal supporter of Brexit, also ventured a forecast of the length of a likely consumer slow down. “It looks like the external economic pain will last into the first half of next year. When there’ll be a shift back into interest in clothing is a much harder one to call,” he said.

There’s obviously no way of knowing whether or not such forecasts will turn out to be accurate. For retailers however, the emergence of potentially damaging input price inflation has particularly bad timing. 2017 is the year in which many expect to feel the first hit to their bottom lines from rises in the National Living Wage, business rates, an apprenticeship levy and energy taxes.

All of those additional headwinds may lead high street operators into raising prices to offset increased overheads.

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