LONDON — “It is still possible to pretend that Brexit hasn’t happened,” UBS analysts wrote in a recent note. “We think that this will change in the coming year.”
The investment bank is predicting a crunch year for clothing retailers as Brexit-driven inflation begins to hit people in their wallets.
In its latest “Evidence Lab” consumer survey, UBS found that the majority of the 2,000 people it surveyed feel negatively about their financial situation and feel their discretionary income — the amount left to spend after paying for essentials like rent, food, and utilities — is declining.
That’s because it is. Inflation is rapidly accelerating, rising from 1.8% in January to 2.3% in March. Economists expect it could top 3% later this year. That means prices are rising much more rapidly than wages.
For now, consumers are absorbing the price rises. Retail sales jumped 1.4% in February.
But UBS is seeing a “dramatic reduction in consumer discretionary income and intention to spend.” This chimes with GfK’s consumer outlook, with results released on Friday showing consumers have a net negative outlook for spending, at -6. The 3-month trend for retail sales also shows a sharp decline.
Figures released by the Confederation of British Industry (CBI) also point to a slowdown for retail. Rain Newton-Smith, the CBI’s Chief Economist, said: “Momentum eased towards the end of the first quarter, particularly among consumer service and retail companies.”
As prices rise, consumers will be looking to make savings where they can and the victims of this penny pinching appear to be clothing retailers. UBS’s Adam Cochrane and Andrew Hughes said: “The biggest decline in sentiment relates to clothing, consumers over 55, and lower income demographics.”
“The only real winners from the survey were discount retailing and online,” the analysts write, “and this gives us three of our top picks in B&M, Card Factory and ASOS as structural winners.”
UBS believes it will be “at least 12-18 months” before any recovery in the market, saying: “With Brexit likely to weigh on confidence we prefer exposure to structural growth in online of beneficiaries of trading down in discount retail.”
This is not just bad news for the likes of Debenhams and Marks & Spencer. This could be devastating for the UK economy. Once derided as a nation of shopkeepers, Britain is now a nation of shoppers and a large part of the nation’s economic engine is fuelled by consumer spending.
The Office for National Statistics (ONS) final fourth quarter GDP report, released Friday, shows just how much our economy relies on consumer spending. The ONS said the 0.7% growth on the previous quarter was driven by “a continuation of strong consumer spending and strong output in consumer-focused industries.” However, UBS warns: “We think the better than expected Q4 2016 is a false dawn.”
If consumer spending slows down in retail, it could have a negative effect for overall economic growth. Business investment is already slipping, down by 0.9% in the fourth quarter, making consumer spending more important than ever for growth.
In February, Oxford Economics described the upcoming consumer slowdown as a “troubling omen” stalking Britain, while Pantheon Macroeconomics said that spending tailing off would leave the economy “extremely vulnerable.”
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