Image Source: Exchange Rates
After data revealed that UK retail sales plunged significantly in August as the rise in the cost of living continued to affect consumers, the pound dropped to a 37-year low against the US dollar.
The 1.6% larger-than-anticipated decline in sales volumes raised further worries about the status of the economy.
August saw a decline in sales across all retail segments as consumers made spending cuts in response to price increases.
According to one researcher, the data proved that the UK is already in a recession.
Following the publication of the retail sales data, the sterling dropped more than 1% versus the dollar, reaching a low of $1.1351 for the first time since 1985. Later, the pound recovered to rise above $1.14.
For most of the year, the pound has been losing value relative to the dollar, partly because of the dollar’s rise. Because of the weak pound, British tourists will find that their money does not go as far.
This occurs when UK inflation, or the rate at which prices increase, is at a level over 40 years high, albeit declining from 10.1% in July to 9.9%.
The Bank of England forecasts that the UK will experience a recession around the end of this year and that interest rates will continue to rise to control inflation.
Households have cut back on spending as a result of rising costs and expected energy bill increases in October.
Last week, the government launched the Energy Price Guarantee to assist people with their energy bills. The assistance will result in a two-year cap on the yearly energy expense for a typical home at £2,500.
Before the government took action, annual energy costs were anticipated to reach £3,549 before going much higher in 2023.
Because of the intervention, any recession would be “smaller and shorter” than anticipated, according to Ms. Cross of Capital Economics.
Next Friday’s “mini-Budget” is expected to include tax cuts promised by Prime Minister Liz Truss to help the economy and the estimated cost of proposals to regulate energy prices.
The recent drop in the value of the pound against the dollar to a new 37-year low is not a unique event. In addition, the pound fell to its lowest point in relation to the euro in almost two years.
Therefore, even while the US dollar is strengthening overall, the pound sterling is still coming under specific additional pressure on global markets.
The trigger this morning was much poorer than anticipated retail sales data. However, the markets will wait until next Friday to learn how much borrowing will be necessary for the government’s energy plan and tax cuts.
Even if the Eurozone is experiencing a recession, this corporation offers no solace.
The danger is that a weaker currency will increase the cost of imports of necessities like food and energy, extending the era of severe inflation. Additionally, exporters won’t benefit significantly from a weaker pound if the UK’s closest trading partners are also experiencing a recession.
The Office for National Statistics (ONS) said that the decline in retail sales has been ongoing since the summer of 2021 when all Covid restrictions were lifted. Since December 2021, the August decline was the greatest month-over-month decline.
The pound and the UK economy
According to the ONS, food, non-food, online, and gasoline sales decreased throughout the month.
While alcohol and cigarette sales increased by 6.3% in August, supermarket sales volumes decreased by 0.9%.
The ONS reports that sales at department stores decreased significantly in August by 2.7%, while sales at clothes stores decreased by 0.6%.
John Lewis reported on Thursday that although the number of consumers was greater than the previous year, they were spending less and not purchasing as many “big ticket” items.
For the first half of its fiscal year, the department store and its retail network Waitrose posted a deficit of £99 million. Waitrose said that basket sizes had decreased by “almost a fifth” and that sales were down 5% from the previous year.
Following Russia’s invasion of Ukraine, food costs have been rising globally, which has been one of the key factors driving up prices at supermarket checkout lines.
While it decreased from 26.3% in July to 25.7% in August, the percentage of retail sales made online is still much higher than it was before the pandemic.