The British pound fell on Friday to a fresh 37-year low on the US dollar — and a 17-month low on the euro — as weaker-than-expected retail sales figures added to the many concerns about the health of the UK economy.
Growing evidence of a UK recession and the political uncertainty of a new and untested UK government have combined with the rise of the US dollar to hurt the UK currency.
The pound fell more than 1% against the dollar to 1.1351, its lowest since 1985.
The UK currency has fallen around 16% this year.
The euro rose to as high as 87.66p, its highest level since February 2021.
The Office for National Statistics said retail sales volumes dropped 1.6% in monthly terms in August, the biggest fall since December 2021.
“Retail sales volumes fell by 1.6% in August 2022, continuing a downward trend since summer 2021 following the lifting of restrictions on hospitality; in recent months, rising prices and cost of living are also affecting sales volumes,” said the ONS.
“All main sectors (food stores, non-food stores, non-store retailing and fuel) fell over the month; this last happened in July 2021, when all legal restrictions on hospitality were lifted.
“Non-food stores sales volumes fell by 1.9% over the month because of falls in each of its sub-sectors: other non-food stores (negative 2.8%), department stores (negative 2.7%), household goods stores (negative 1.1%) and clothing stores (negative 0.6%).
“Non-store retailing (predominantly online retailers) sales volumes fell by 2.6% in August 2022; despite this fall, sales volumes were 24.4% above their February 2020 levels.
“Food store sales volumes fell by 0.8% in August 2022, which leaves them 1.4% below their pre-coronavirus (COVID-19) levels in February 2020.
“Automotive fuel sales volumes fell by 1.7% in August 2022; these were 9.0% below their February 2020 levels.
“The proportion of retail sales online fell to 25.7% in August 2022 from 26.3% in July 2022; despite this fall, it remains significantly above pre-coronavirus levels (19.8% in February 2020).”
Victoria Scholar, Head of Investment, Interactive Investor: “UK August retail sales fell by 5.4% year-on-year falling short of analysts’ expectations for a decline of 4.2%. Excluding fuel, sales fell by 5% also shy of estimates for a drop of 3.4% year-on-year.
“Month-on-month retail sales ex-fuel fell by 1.6%, the biggest decline so far this year versus forecasts for a drop of 0.7%.
“In last month’s data, consumers spent more than expected in July, thanks to the raft of discounts that tempted shoppers to spend, particularly online.
“However, August saw spending slump again with a decline in retail sales for the fourth month out of the last five as the downtrend since the summer of 2021 continues.
“The cost-of-living crisis and spiralling prices have dampened consumer spending as squeezed household budgets leave many families with little if anything left over at the end of the month for discretionary spending.
“There has even been a drop in essential spending on things like food and fuel with households forced to make tough spending choices.
“Today’s data confirms earlier figures this month from Barclaycard suggesting that discretionary spending on items like clothing, DIY and beauty have collapsed as household bills rise.
“The pound fell after this morning’s data with GBPUSD shedding more than 0.25% at one stage before regaining some lost ground.
“Cable (pound-dollar) has had a torrid time lately shedding more than 15% year-to-date, driven by supercharged demand for the greenback combined with a slump in international investor confidence in the UK.”
Walid Koudmani, chief market analyst at financial brokerage XTB: “The situation with the pound continues to be concerning after it reached a 37 year low against the dollar with the GBPUSD pair dropping around 1% and reaching a low of 1.135 before rebounding slightly.
“While dollar strength is certainly playing into it with the Fed taking significant action to contain inflation, the precarious situation the UK economy finds itself in, further highlighted by today’s retail sales report, is not helping either.
“The Bank of England has a tough job ahead of it as it must strike the balance between managing inflation, supporting the currency while simultaneously not negatively affecting the overall economy further.”
MUFG analyst Derek Halpenny: “Today’s retail sales data just released were terrible …
“The sterling-dollar exchange rate has further to fall in circumstances of increased financial market volatility.”
Olivia Cross, economist at Capital Economics: “The 1.6% drop in retail sales volumes in August supports our view that the economy is already in recession.
“Retail sales will probably continue to struggle as the cost of living crisis hits harder in the coming months.
“But nonetheless the Bank of England will still have to raise interest rates aggressively.”
John Hardy, head of FX strategy at Saxobank: “The grinding backdrop of everything that’s going on is weighing on sterling, with the UK running these massive external deficits and the risks around the new prime minister’s policies adding to that.”
James Richard Sproule, Chief Economist, UK, Handelsbanken: “UK Retail Sales for August have come out at -1.6% m-o-m, -5.4% y-o-y (consensus -0.5% m-o-m, -4.2% y-o-y), these results are worse than expected, a combination of rising inflation and falling consumer confidence having an impact.
“Non-food stores sales volumes fell by 1.9% over the month and were 2.0% below their pre-pandemic February 2020 levels. Other non-food stores, such as sports equipment and toy stores, reported a monthly fall in sales volumes of 2.8% in August 2022, while department stores fell by 2.7%.
“These figures are in some ways unsurprising as UK Consumer Confidence has continued to plumb new depths over the summer (GfK’s confidence figure for Aug was -44, an all-time low).
“The interesting data will be next month, when we can begin to gauge the impact of the latest Government intervention in the energy market and how it might improve wider confidence and wiliness to spend. For the moment, discretionary spending is clearly on a downwards trajectory.
“While overall online sales fell, it was a less notable fall than sales overall and suggests consumers do, at times, find it easier to shop for bargains online.
“Online retail sales continue to be of interest, moving from approximately 20% of retail before the pandemic, they peaked at over 50% above pre-pandemic levels, but have now fallen from 26.3% of overall sales in July to 25.7% in August.
“We view this level as being close to the new equilibrium, with consumers having adopted new patterns of shopping (notably food shopping has doubled to 10% of food sales and there is little volatility in spending patterns, suggesting there will be no reversion to mean).
“This shift in spending patterns is having an ongoing impact on retail property values, particularly more indifferent non destination High Streets (lacking green space, lacking ancillary amenities such as good cafes, lacking parking or transport) where competition with people’s sitting rooms is proving acute.”
Martin Beck, chief economic adviser to the EY Item Club: “Real household incomes are still on course for a significant fall over the next 12 months or so.
“And with unemployment likely to rise, if modestly by the standards of past downturns, and the geopolitical outlook also full of uncertainties, confidence is unlikely to see much of a revival.
“So, the recession which retailers currently find themselves in is likely to persist through the rest of this year and into 2023.”
Kevin Brown, saving specialist at Scottish Friendly: “Household budgets are being squeezed ever tighter as living costs continue to rise and it’s forcing consumers to make cutbacks.
“Although sales of essentials like food and fuel still fell in August, it’s spending on non-essential items where we’re seeing the biggest decline.
“The impact of inflation is clearly evident with sales volumes going down, while the value of sales goes up. Households are effectively having to pay more for less, which is forcing consumers to reduce what they buy.
“Inflation may finally be starting to reach its peak, especially if the government’s plans to prevent energy bills from rising higher this winter are successful. But there is still a large degree of uncertainty and inflation is likely to remain high for some time.”
Richard Hunter, Head of Markets at Interactive Investor: “Further market weakness capped off a fairly miserable week for investors, with inflationary concerns remaining front and centre.
“The US economy is showing little sign of succumbing to Federal Reserve pressure, giving the green light for the current path of interest rate rises to continue. Indeed, such is the backdrop over recent days, including a hotter than expected inflation print, that the scale of the Fed’s action next week is currently under review by the market.
“While a hike of 0.75% remains the majority view, there is a growing chorus on the possibility of a 1% rise. The latest economic readings showed an unexpected rebound in August for US retail sales, as consumers chose to spend some of the savings arising from lower gasoline prices on the likes of cars and socialising.
“In addition, the weekly jobless claims number showed a decline to the lowest level since May, underpinning the current resilience of the labour market. A slight dip in manufacturing data was the only print to potentially play into the hands of those seeking to identify a weakening economy.
“With inflation remaining the major thorn in the side for central banks globally, the inevitable rate rises to lower the current levels are leading investors to question how high the possibility of recession is now becoming, with any policy errors due to over-tightening likely to be the root cause.
“Downbeat outlooks from the International Monetary Fund and the World Bank echoed such a possibility.
“In the meantime, the bond market is in clear agreement, with yields remaining sharply inverted, often seen as a harbinger of recession. The major indices resumed their decline, with the Dow Jones now down by 15%, the S&P500 by 18% and the Nasdaq by 26% in the year to date.
“In Asian markets, what could have been interpreted as promising news was not sufficient to stem further declines. Retail sales in China increased by 5.4% in August, beating expectations of a 3.5% rise, while industrial output rose by 4.2% against forecasts of 3.8%.
“Despite these numbers, the localised issues which the Chinese economy is facing remain intact, while the immediate outlook is being tainted by events elsewhere, most notably from the US, but also in terms of the fresh and negative IMF/World Bank outlooks.
“In the UK, retail sales showed no signs of the resilience which the US equivalent had displayed. A decline of 1.6% month-on-month came against forecasts of a 0.5% fall, with the cost of living crisis beginning to take a visible effect on consumer habits.
“Each of the measured sectors fell in the month, putting further pressure on the economic outlook. The FTSE250, which has borne the brunt this year of perceived UK weakness given its more domestically-focused nature, has now entered bear market territory once more, having dropped by 20% in the year to date.
“The general gloom also permeated to the FTSE100, which opened unsurprisingly lower. Losses were broad based, but particularly marked in the mining sector on weakening demand, and in the housebuilders amid an increasingly challenging environment.
“Marginal rises from four of the five largest constituents of the index – BP, Shell, AstraZeneca and HSBC – mitigated some of the pressure, but the premier index slipped again to stand down by 1.8% in the year to date.”