The British Retail Sector Continues to Boom, But Are There Storm Clouds Ahead?

a year ago
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For all the bluster and trepidation surrounding Brexit, the British economy has yet to showcase any adverse, long-term effects. This is certainly true in the booming retail sector, which continued to enjoy exponential growth during the third quarter of 2016.

In fact, UK retail sales surged to a 14-year high in October, on the back of an increased demand for warm weather clothes and a larger-than-usual Halloween spend. The seasonally adjusted volume of sales was also an impressive 1.9% higher than during September, highlighting a sudden and pronounced increase that caught experts off-guard.

This trend continued throughout the third quarter too, with Brits spending a cumulative total of £77.56 billion during the festive period. Unsurprisingly, this sustained level of optimism and investment took the UK's consumer spending index to an all-time high at the end of 2016, while households nationwide appeared totally oblivious to the potential implications of Britain's proposed exit from the EU.

What Can We Draw From Pronounced Retail Growth in the UK?

In fact, the British consumers' immunity to the threat of Brexit is arguably the most striking aspect of the recent retail growth in the UK. After all, we have seen carnage in the courts and the financial markets, with ETX Capital reporting that the value of the British pound sunk to a 31-year low on two separate occasions in the wake of the Brexit vote. Despite this, British shoppers have showcased impressive determinism by maintaining their spending levels, although whether this is due to ignorance or an innate understanding of the situation could probably be debated at length.

In truth, consumers have probably been heavily influenced by the relatively robust performance of the UK economy since the referendum result was announced. Unemployment fell by 52,000 to 1.6 million in the three months to November 2016, for example, which short-term, real wage growth and increased business confidence also created a positive sentiment that seems to have engulfed the retail market.

This is indicative of the post-recession economy, where everyone from traders and entrepreneurs to consumers have developed increasingly thick-skin and a keen sense of determinism. This means that they are unlikely to react emotively to data releases or scaremongering relating to the Brexit vote, and when coupled with a prosperous economic picture we are far more likely to see heavy spending across multiple markets.

On top of this, we must also note the fact that inequality has narrowed considerably in the UK during recent times. This was reflected by the fact that disposable incomes rose by £600 year-on-year during 2016, creating a greater sense of wealth and more money for households to spend each month. These factors have undoubtedly combined to create a positive economic climate where consumers are compelled to spend, and this certainly explains the increased levels of confidence and activity in the retail sector.

The Storm Clouds Ahead: Why the Current Spending Levels May Not be Such Good News

If the Brexit discourse and subsequent vote taught us one thing, however, it is that the electorate can be somewhat myopic when debating certain issues. There is also an underlying sense of short-term thinking that appears to have gripped modern-day consumers, and this potentially dangerous outlook could reap devastating results if the current level of spending is sustained indefinitely over time.

After all, while the economy is booming at present, there is not one single metric that can be guaranteed to continue throughout 2017. Much of this has to do with the looming shadow of Brexit, as while the economic remains relatively resilient at present, we are likely to see a sharp depreciation once Prime Minister Theresa May actually triggers Article 50. After this we will see a prolonged and difficult negotiation, while the continued uncertainty surrounding the UK's long-term fate will surely take it toll on businesses and households alike.

If this is factor alone is not enough to encourage caution among consumers, a look beyond the economic headlines should provide further incentive. While real wages may have increased incrementally during 2016, for example, we should not forget that Chancellor Philip Hammond has suggested that they will continue to fluctuate for the next decade. In fact, pay in real-terms is likely to remain below 2008 levels until the year 2021 at least, meaning that spending could soon begin to outstrip earnings if it continues at its current rate.

Even the recent hike in disposable income may be countered by rising inflation, which will near 3% this year and send the cost of living soaring. This will gradually eat into any additional wealth that households in the UK are able to accrue, meaning that excess spending now could increase debt levels significantly and have a devastating, long-term impact on the economy.

The issue of consumer debt is also a huge consideration, with many experts believing that this is continuing to drive inflated levels of spending as households struggle to heed the harsh lessons of the Great Recession. It is no coincidence that as retail sales were peaking at a 14-year high, for example, credit card debt also hit its highest point in 11 years while increasing by £571 between October and November. This left British households with a cumulative (and unprecedented) credit card debt of £66.2 billion, and while this alone is not responsible for increased spending it is a worrying trend with a potential, economic contraction waiting around the corner.

The Last Word

Ultimately, increased consumer spending in the UK has been triggered by a number of factors, including positive economic data releases and credit growth. The issue is that much of the economies recent growth is short-term and largely unsustainable, while the amount of credit card debt being accrued will exact a heavy toll on households for years to come. Given this and the that the realisation of Brexit will increase the cost of imports to British firms and send consumer prices soaring, this is a worrying state of affairs that the government will need to watch closely in the month ahead.

Otherwise, the UK could be set for a substantial economic fall while households count the cost of unconsidered, and in some cases reckless, spending.

 

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