After data revealed that UK retail sales dropped 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.
New worries about the state of the economy were raised by the 1.6% larger-than-expected decline in sales volumes.
As a result of consumers cutting their budgets in response to rising costs, sales across all retail sectors decreased in August.
According to one researcher, the results proved that the UK is already experiencing a recession.
Following the announcement 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 and rose beyond $1.14.
For most of the year, the pound has been losing value against the dollar, partly because the dollar is so strong. However, British tourists will discover that their money does not go as far because of the weak pound.
This occurs at a time when UK inflation, which is the rate at which prices grow, is running at a nearly 40-year high, despite declining to 9.9% from 10.1% in July.
The Bank of England has predicted that the UK will enter a recession at the end of this year and that interest rates will continue to rise to combat inflation.
Households have cut back on spending as a result of rising costs and expected energy bill increases in October.
Last week, the government established the Energy Price Guarantee to assist citizens with their energy expenses. The assistance will result in a two-year cap on an average household’s yearly energy costs at £2,500.
Before the government took action, annual energy costs were projected to reach £3,549 before going much higher in 2023.
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 stimulate the economy and the estimated cost of proposals to regulate energy prices.
The recent drop in sterling’s value 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 nearly two years.
Therefore, even while the US dollar is strengthening overall, the pound sterling is still coming under specific additional pressure in global markets.
The trigger this morning was much weaker-than-expected retail sales data. However, the markets will wait until next Friday to find out how much borrowing will be necessary for the government’s energy plan and tax cuts.
Although the Eurozone is also experiencing a recession, such a corporation offers little solace.
The danger is that a declining currency will increase the cost of imports of basic goods like food and energy, extending the period of severe inflation. Furthermore, 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) reported that the decline in retail sales has been ongoing since all Covid restrictions were lifted in the summer of 2021. Since December 2021, the drop in August was the greatest month-over-month drop.
According to the ONS, fuel, non-food items, internet purchases, and food sales decreased in the month.
Although alcohol and cigarette sales increased by 6.3% in August, supermarket sales volumes decreased by 0.9%.
Implications of the Pound fall
The ONS reports that sales in department stores decreased significantly in August by 2.7%, while sales in clothes stores decreased by 0.6%.
Read Also: Pound in huge fall against the dollar in August
John Lewis said on Thursday that although the number of shoppers was higher than the previous year, they were spending less and not purchasing as many “big ticket” items.
For the first half of the fiscal year, the department store and its supermarket 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 prior year.
Following Russia’s invasion of Ukraine, food costs have been rising globally, which has been one of the major factors driving up prices at supermarket checkout lines.
Online retail sales decreased to 25.7% in August from 26.3% in July, but this level is still much higher than it was prior to the pandemic.
