Recession looming large over UK

Tuesday 03rd September 2019 15:29 EDT

The prospect of a Brexit-induced recession is looming larger after a poll signalled that sales dropped sharply in August, dealing a blow to hopes that consumer spending can rescue Britain’s ailing economy. Just 10 per cent of retailers surveyed by the business lobby the CBI reported sales had increased over the past year, while 58 per cent said sales were down. Outlook for the month ahead is to hit its lowest level as Brexit fast approaches. Respondents expect the sharpest deterioration in business conditions since February 2009 when the UK was in the middle of recession.

If a significant drop in consumer spending is confirmed in official data, it would spell bad news for the economy as a whole. While businesses have slashed investment in the face of continued uncertainty around Brexit, shoppers have been keeping the economy afloat. Anna Leach, CBI deputy chief economist, said: “Sentiment is crumbling among retailers, and unexpectedly weak sales have led to a large overhang of stocks. With investment intentions for the year ahead and employment down, retailers expect a chilly few months ahead. “It is unsurprising that business confidence has deteriorated sharply, with a potential no-deal Brexit on the horizon.” Retailers are also “buckling under the cumulative burden” of costs such as business rates and the apprenticeship levy, the CBI said.

After a surprise contraction in the last quarter, the UK is flirting with a recession, defined as two consecutive quarters of falling GDP. However, there is some disagreement among economists as to how closely the CBI’s figures reflect retailers’ actual sales. The long-running survey which has been a reliable barometer of retail performance, has increasingly diverged from official figures in recent months. Analysts at Capital Economics said they are “sceptical” that consumers will falter in the way that manufacturing already has. “In all our Brexit scenarios, we think households will remain the strongest part of the economy,” they said.

Capital Economics said the CBI survey covers less than 50 per cent of the retail industry and may focus more heavily on bricks and mortar stores. As these retailers are broadly experiencing more of a decline than online competitors, the CBI figures may exaggerate the severity of the overall picture.

Official data, which covers around 93 per cent of the retail industry but lags behind the CBI survey, showed household spending grew 3.3 per cent in July compared to a year earlier. The question now is whether that performance will hold up. Capital Economics warned that, even taking account of the room for optimism, a no-deal Brexit would likely lead to a fall in spending of around half a per cent next year.

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