Last year’s shock Brexit vote was preceded by a raft of dire predictions. Bank of England governor Mark Carney warned that a leave vote ‘could possibly include a technical recession’, while the IMF’s annual report, issued a week before the vote, warned that by 2019 GDP could take a 5.5 per cent hit.
Despite such warnings, and much to the delight of pro-Brexit voters, the UK economy has been surprisingly resilient since the vote, with GDP rising 0.3 per cent in the second quarter of 2017. Until the start of this year, retailers were grateful beneficiaries of the post-Brexit boom, but what is next for them?
The plummeting pound
Brexit naysayers were right about the effect on the pound sterling. Following Mr Carney’s pre-vote comments, then-Chancellor George Osborne said the bank faced a trade-off between ‘stabilising inflation on one hand and stabilising output and employment on the other’ due to a collapse in the national currency.
That trade-off might not be fully actualised as of yet, but the pound’s fall of around 15 per cent against the US dollar has led to a pickup in inflation, with consumer prices rising around 5 per cent according to the Centre for Retail Research (CRR). Consequently, the CRR has adjusted its predictions for 2017 retail growth down from 1.7 per cent to 1.6 per cent, with an even slighter growth rate of 1.2 per cent for 2018. This is considerably lower than recent years.
How resilient is retail?
The impact on consumers of a sharp fall in the pound was not immediately apparent after the Brexit vote, but reality is beginning to bite as retailers lose capacity to absorb the effects of inflation without passing it on to shoppers. Most retail goods are imported, particularly groceries, and the cost of some of our favourite brands have been noticeably shifting upwards. The price of Marmite, for example, has increased between 10 and 15 per cent across different stores over the last few months (and that’s whether you like it or hate it).
Despite dampening effects on retail’s growth trajectory, the true picture is not in fact clear. The first quarter of 2017 did experience a significant slowdown in retail spending and its largest contraction since 2010 at 1.4 per cent. The latest results from the Office for National Statistics, however, show an increase of 1.5 per cent across all store types in Q2, with clothing purchases being one of the main drivers of growth.
A Brexit-induced fall in the pound has caused an uptick in CPI inflation as it hovers above the BoE’s 2 per cent target at 2.6 per cent. In isolation, this may not be much of a concern for retail, but the headline figure masks effects such as low fuel prices.
Andrew Sentance, a former member of the BoE Monetary Policy Committee, recently suggested that inflation has not yet peaked. With household budgets being squeezed as wages fail to keep up with inflation, it is uncertain how long consumer resilience will continue to provide support to retailers. Britain’s shoppers remain full of surprises, however, so predictions for the second half are on hold for now.