News & analysis

Retail sales data out this morning showed an alarming slide in consumer spending, putting the prospect of a UK recession back on the table for policymakers. Including fuel costs, sales dropped by 0.9% in September, and printed at -1.0% YoY. Whilst the latter is a modest improvement on the -1.3% YoY figure recorded in August, both readings significantly undershot pre-release expectations that had been looking for declines of 0.4% and 0.2% respectively.

Furthermore, core retail sales showed worse developments, undershooting expectations by a large margin to print at -1% MoM and -1.2% YoY respectively. In this light, it seems all but impossible for policymakers to consider raising Bank Rate next month when they meet for the November monetary policy meeting. Instead, we continue to expect that the Bank of England will keep rates of hold well into 2024. Whilst we don’t think today’s data is indicative of a sharp economic contraction, downside risks to our call for stagnant growth are beginning to mount.

As such, with indications of a deeper than anticipated slowdown beginning to stack up, market speculation is shifting towards the prospect of rate cuts sooner rather than later, a dynamic that is weighing on front-end Gilt yields and the pound this morning.

Looking at the details of the release, the picture looks even worse than the headline figure suggests. Whilst sales volumes for food and fuel stores ticked up marginally last month, non-food stores sales volumes fell by 1.9% in September, with non-store retailing posting a 2.2% decline. Indeed, sales volumes have now fallen by roughly 11% since the peak in April 2021 looking at seasonally adjusted figures, underlining the long-term weakness in UK consumer demand, which under pressure from inflation has failed to recover post-Covid. Commentary from the ONS suggests that much of the spending weakness is attributable to cost of living pressures, though unseasonably warm weather in September also likely saw the postponement of Autumn clothes sales, weighing on the month’s reading. Even so, the signs of softening consumer spending corroborates evidence from BRC indicators and the PMI survey, both of which suggested that demand conditions are now seeing a meaningful slowdown.

UK sales volumes have flatlined since the economy reopened as consumption was pinned down by higher inflation 

Notably, with worries around UK growth having helped deliver a hold from the Bank of England in September, this month’s retail sales release is likely to hammer home these concerns for policymakers. Granted, the September flash PMI that prompted this was ultimately revised upwards to show only a modest softening in activity rather than a sharper contraction indicative of recession.

Even so, given recent data releases the MPC can now reasonably conclude that spending is under significant pressure, that this is translating into slowing price growth and therefore that no further rate rises are necessary. With monetary policy on hold the focus for both market and policymakers is likely to focus increasingly on growth indicators to assess the damage from policy tightening to date. Key on this score will be next week’s October flash PMI release, where we expect the UK will continue to outperform the Eurozone. Indeed, with real wages now growing, cost of living pressures should begin to ease even as inflation continues to cool, suggesting the UK is set for a stagnation rather than a nasty recession in our view. That being said, risks to the downside are accumulating, and markets are trading with this in mind to start the day.

Bank Rate expectations continue to ease with swaps now price only an 11% chance of a hike in November and the prospect of rate cuts coming sooner and faster than they were yesterday. This has seen sterling has given up 0.35pp against the dollar in the early morning session, as lower rate expectations and weak growth see the pound come under renewed pressure.



Nick Rees, FX Market Analyst


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