Pound drops as concerns about a UK recession are fuelled by weak retail sales

16th September 2022 | Lucy Millar

A drop in retail sales last month sparked heavy selling of the pound on global money markets, pushing it to a 37-year low against the dollar, as investors feared that the British economy had already entered a recession.

The Bank of England is due to raise interest rates next week, which will cause average UK wages to continue to lag behind rising prices. As a result, sterling dropped more than 1% against the US dollar to $1.135, its lowest level since 1985.

The pound also hit a 17-month low against the euro on Black Wednesday, the 30th anniversary of the day the UK abruptly left the European Exchange Rate Mechanism, with €1 being worth 87.66p.

Retail sales fell by 1.6% in August compared with July – more than anticipated

Retail sales in Great Britain were being impacted by rising prices and cost of living, according to the ONS, and economists warned that there were signs that the economy was already in a recession.

The government’s $150 billion energy price freeze plan, according to economist Olivia Cross of Capital Economics, is expected to make the UK recession shorter and milder, but all the signs point to the economy already contracting.

“The 1.6% decline in August retail sales volumes supports our view that the economy is already in recession,” she said. “Retail sales will probably continue to struggle as the cost of living crisis hits harder in the coming months. But nonetheless the Bank of England will still have to raise interest rates aggressively.”

Online sales also fell in August

To highlight the severity of the decline, online sales fell from 26.3% of all sales in July 2022 to 25.7% in August 2022, despite the fact that they are still significantly higher than the 19.8% pre-coronavirus levels.

Lisa Hooker, the industry leader for consumer markets at PwC, stated that consumers are buying less as a response to price increases. As the crucial Christmas shopping season approached, she said this was a concern for retailers.

“As we approach the critical ‘golden quarter’ in the run-up to Christmas, retailers will be looking with anticipation to the outcome of next week’s mini-budget.”


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