Insight

UK attention to retail: Mild February drives retail sales, however the outlook remains challenging

April 2019

UK retail followed up its strong start to the year with another month of like-for-like growth in February, posting high value and volume growth of 4.1% and 3.8% respectively, as consumer spending remained resilient in the face of a weakening economic outlook.

Unemployment continued its record-setting run, reaching a new 44-year low of 3.9%, despite continued uncertainties around Brexit.

Benefitting from February's mild temperatures, certain sectors fared better than others. Other stores were the clear winner, posting value and volume growth of 7.2% and 7.7%, respectively. Fashion also had a surprisingly strong month with its second largest increase in the last 12 months.

Whilst this is positive news for the industry, the broader backdrop for UK retail remains extremely challenging and we have already seen several firms face financial difficulty in 2019, with the likes of LK Bennett and Debenhams falling into administration with more likely to follow.

Overall, although February was certainly a strong month for retailers, the question remains as to whether it can be repeated given the weak economic outlook. Considering the recent extension to Article 50, Christine Lagarde, head of the IMF, commented that any prolonged extension is likely to have a "negative impact" on the UK economy. With Brexit uncertainties set to continue, economic growth beginning to slow and the availability of cheap credit beginning to decline, it may force consumers to be more selective in how they spend their pay packets in future months.

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UNEMPLOYMENT

Despite continued uncertainty around Brexit, January saw the UK unemployment rate fall to a new low of 3.9%, the lowest level since 1975.

With the market close to full employment and with increased competition for labour, UK workers' total earnings, excluding bonuses, increased by 3.4% in the three months to January 2019.

After a period of stagnant real wage growth, the reduced inflation rate is also translating into an increase in disposable income for households. In the three months to January 2019, real wages rose by 1.4% ‒ the fastest rate since August 2016. With the rate of inflation anticipated to remain steady in coming months, the trend of real wage growth shows no sign of subsiding.

CONSUMER CREDIT

The rate of consumer credit growth fell sharply to 3.3% in February, down from 4.2% in January, indicating that the Bank of England's monetary policy is having the desired effect of slowing the increase in consumer demand for debt. February saw the lowest increase in the growth rate since August 2014.

While this will come as welcome news for the Bank of England, the slowdown is likely to worry retailers as policy and concerns over the economic outlook are seemingly limiting consumer willingness to borrow. With household spending underpinning the UK's economic expansion since the 2016 Brexit vote, any decline in consumer spending is likely to point towards weaker economic growth over the coming months.

FOOTFALL

The Met Office reported that February 2019 had the warmest daily maximum temperatures since records began in 1910 averaging out at 10.0°C. Temperatures reached a staggering 21.2°C (recorded in Kew Gardens, London) as the country was dominated by high pressure, particularly in the second half of the month.

Unfortunately for UK retailers, the warm weather did little to entice consumers back to the high street as footfall contracted by 4.4% in February, the 37th consecutive month of year-on-year decline.

The South East and South West and Wales performed particularly badly with declines of 7.4% and 8.0% respectively. Although Scotland and West Midlands bucked the trend to report increases of 0.3% and 0.2% respectively, this may reflect a low base in February 2018 as the UK was hit by "the Beast from the East".

PROPERTY PRICES

Average house prices in the UK fell by £663 to £211,304 in January 2019, as property prices continued to stagnate.

The London property market remains particularly challenging, with house prices decreasing by 3.8% in the first quarter of the year – the biggest drop since 2009.

Andrew Montlake, director of mortgage broker Coreco, commented that "London is particularly sensitive to ongoing political uncertainty but it is also paying for the astronomic house price growth of five or six years ago."

Given the uncertainty predicted for 2019, worsened by the recent extension to Article 50, the property market is likely to offer little support to the UK's retail sector over the coming months.

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