U.K. Retail Sales Drop in March as Inflation Hits Consumers -- Update
21 April 2017 - 2:25PM
Dow Jones News
By Wiktor Szary
LONDON--U.K. retail sales dropped sharply in the first quarter
of the year, as accelerating inflation began to crimp household
budgets, new data showed.
Consumer spending has been a key engine of U.K. economic growth
and signs that it is starting to stall comes at an awkward time for
Prime Minister Theresa May, who this week called a surprise early
general election for June 8.
Announcing her decision, Mrs. May highlighted the U.K.'s
surprising economic strength in the wake of the U.K.'s vote to
leave the European Union, saying growth has "exceeded all
expectations" since Britons chose to leave the bloc in June last
year. Official data show that the U.K.'s better-than-expected
economic performance was underpinned largely by consumer
resilience.
But the first three months of 2017 saw a sharp decline in retail
sales, which fell by 1.4% on the earlier quarter after adjustment
for regular seasonal fluctuations, the Office for National
Statistics said. That was the largest drop in seven years.
It means retail sales subtracted from the U.K.'s quarterly
economic growth for the first time since late 2010, shaving 0.1
percentage points off the first-quarter figure, the ONS said.
In March alone, retail sales fell by 1.8% on the month,
significantly more than the 0.1% fall forecast by analysts polled
by The Wall Street Journal. Compared with March last year, sales
were 1.7% higher, also significantly below analysts'
expectations.
"This is the clearest indication yet that the expected slowdown
in the U.K. economy has begun," said Andrew Sentance, senior
economic adviser at PwC in London. An official estimate of the
U.K.'s economic growth in the first quarter is expected next
week.
Inflation in the U.K. has gained pace in the wake of the Brexit
vote, and prices continued to rise at the fastest pace in over
three years in March, fueled in part by the pound's sharp
post-referendum depreciation.
Despite a robust labor market, with unemployment at levels that
were last lower in the mid-1970s, Britons' wages after inflation
grew only modestly the start of this year. That suggests British
workers are now facing a living-standards squeeze and are likely to
watch spending closely in coming months.
The Bank of England expects inflation to peak at around 2.75%
early next year, and Gov. Mark Carney has signaled that he is
prepared to tolerate an overshoot of the bank's 2% target if it
helps keep the economy on an even keel while Mrs. May negotiates
the U.K.'s EU withdrawal.
However, a member of the committee that sets interest rates
Friday indicated he may break ranks with the majority and vote for
a rise in the key interest rate in May, since he expects a rise in
exports and higher business investment to offset any slowdown in
consumer spending.
"Overall, I suspect that the next year or two will see steady
growth, above-target inflation, stronger exports, and a pickup in
business investment," said Michael Saunders, one of four
rate-setters who don't work at the bank full-time.
Proponents of Brexit say the U.K. economy will flourish once the
country is out of the EU through new trade deals and by cutting red
tape. They argue that the pound's depreciation is likely to boost
exports and could go some way toward rebalancing the U.K. economy,
which so far has relied largely on domestic demand for growth.
Earlier this week, the International Monetary Fund raised its
forecast for U.K. 2017 growth, reflecting "the
stronger-than-expected performance of the U.K. economy since the
June Brexit vote." But the fund said it still expects the
referendum decision to bear down on growth, albeit more gradually
than previously thought.
Write to Wiktor Szary at Wiktor.Szary@wsj.com
(END) Dow Jones Newswires
April 21, 2017 09:10 ET (13:10 GMT)
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