Surprise fall in retail sales before Christmas signals cost of living gloom
There was a surprise fall in retail sales last month as shoppers remained cautious given the squeeze on budgets from inflation in the run-up to Christmas.
The Office for National Statistics (ONS) reported a fall in sales volumes of 0.3% compared to October when the effects of fuel sales were excluded.
Economists had expected to see growth of 0.3%, given reports of healthy interest, and spending, on goods during the key bargain-hunting period of Black Friday.
But there was a negative performance across the board in every major retail category except for food during the month, suggesting shoppers were keen to eat at home rather than venture out to cafes and restaurants.
The ONS said it likely reflected evidence that many bought Christmas products early to spread the cost.
Non-food store sales volumes fell by 0.6% and were 1.8% below February 2020 levels, it added.
That could also reflect the impact of travel strikes while a 2.8% dip in online sales possibly included a hit from the bitter, continuing, dispute at Royal Mail.
The ONS upwardly revised data covering October when sales bounced back after a hit from the impact of widespread closures for the Queen’s funeral in September.
The number-crunchers recorded month-on-month growth of 0.9% compared to the previous reading of 0.6%.
The latest figures were released against a backdrop of gloom before the festive season, with consumers and businesses alike struggling under the weight of energy-driven inflation.
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But while budgets are squeezed by rising bills, hopes were raised earlier this week that inflation had peaked after the core consumer prices index measure eased back in November – led by motor fuel prices.
The Bank of England gave some support to that theory on Thursday after it slowed the pace of interest rate rises, raising Bank rate by 0.5 percentage points following November’s 0.75 percentage point hike.
Andrew Bailey, the governor, pointed to a “glimmer” of hope that the worst was behind us – also expressing hope that the economy was performing a bit better than the Bank had expected.
However, it remains concerned that the country’s tight labour market – high vacancies and few workers to fill gaps – will fuel inflation through high pay rises.
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UK inflation hits 10.7%
The issue is also compounded by the wave of public and private sector strikes – mostly over pay – dominating the landscape with unions in many cases seeking increases at least in line with inflation.
The retail sales figures are important as consumer spending accounts for about 80% of the economy.
A closely watched measure of consumer confidence, compiled by GfK, showed a slight improvement this month despite remaining near a record low level.
However, respondents remained concerned about the outlook for their personal finances next year, suggesting a cautionary approach to non-essential spending ahead.
Joe Staton, client strategy director at GfK, said: “Despite the latest GDP figures showing slight growth in October, the warning is of a tough road ahead and that the UK is not out of the recessionary woods.
“Real wages are falling as inflation continues to bite hard, further straining the discretionary budget of many households as we enter the last few shopping days before Christmas.”
The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.
Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.
Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.
An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.
Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.
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On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.
“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.
His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.
Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.
A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.
First things first: don’t panic.
What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.
The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.
That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.
In hindsight, perhaps we shouldn’t be surprised.
After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.
But those financial markets are now reassessing how keen they are to lend to the UK.
The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.
This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.
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Chancellor challenged over gilt yield spike
But the falls in the pound and the rises in the bond yields accelerated today.
This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.
Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.
That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.
The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.
But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.
Rachel Reeves leaving 11 Downing Street before the budget. Pic: PA
And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.
And this is where things get particularly sticky for Ms Reeves.
In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.
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In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.
Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?
Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.
Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.
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Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.
The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.
A Halloween nightmare for any chancellor.
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