UK retail sales and economy reverse due to lockdown

• Pound Sterling (GBP) exchange rates retreat ahead of make-or-break Brexit weekend
• UK retail sales declined in November due to the impact of COVID-19 lockdown restrictions
• Bank of England warn of the danger post-lockdown measures will have on UK economy
• Rishi Sunak extends the furlough scheme by one month until April 2021

EU Chief Negotiator Michel Barnier has poured cold water on pound Sterling (GBP) exchange rates on Friday after he warned that Brexit trade talks between the UK and European Union had reached a “moment of truth.”

The British pound (GBP) has tumbled by 0.3% against the US dollar (USD) in midday trade, with the British pound to US dollar (GBP/USD) exchange rate cross trading at USD 1.3526. At the same time, the British pound to euro (GBP/EUR) exchange rate is 0.3% lower at EUR 1.1037 after jumping to a weekly high of EUR 1.113 on Thursday.

During the last Bank of England’s (BoE) final minutes of the year, policymakers warned that a no-deal Brexit would have significant implications for GBP and the UK economy, with a hard exit from the EU expected to wipe 2% off UK gross domestic product (GDP).

The central bank’s warning comes as hopes for a Brexit trade deal between the UK and the EU rise ahead of December 31st, which is when the transition period ends and the UK must leave the EU’s single market.

Investors are weighing up the latest warning concerning Brexit progress with UK retail sales data published by the Office for National Statistics (ONS) on Friday, which is also weighing on GBP/USD and GBP/EUR.

UK retail sales data declines for first time in six months

According to the ONS, UK retail sales reversed during November, and while the contraction was less severe than preliminary estimates, it marked the first decline since June.

UK retail sales fell by 3.8% month-on-month, primarily due to the reintroduction of tighter COVID-19 restrictions across the UK and a second national lockdown in England. However, this was significantly lower than the -4.2% decrease analysts had forecast.

In England, all non-essential stores were forced to close during the four-week lockdown, which delivered a significant blow to the clothing sector, which suffered a 19% decrease in sales month-on-month.

Debenhams and Arcadia Group, which owns Dorothy Perkins, Evans and Topshop, to name a few, have collapsed under financial pressure due to COVID-19 restrictions, with thousands of jobs now at risk.

However, separate data shows that the majority of consumer spending shifted online, as online retail sales jumped up to 31.2% of total sales in November, compared to 28.6% the previous month and 74.7% higher than the same period during 2019.

The ONS also noted that UK retail sales grew by 2.4% compared to the same month the previous year and remain above pre-pandemic levels.

An ING Bank economist said: “It’s fairly remarkable  UK retail sales only slumped by 2.6% during the November lockdowns.”

He added: “Data from the ONS also reflects huge shifts in the way consumers are shopping, as the latest Coronavirus restrictions have only amplified the divide between online and physical retail” especially with Christmas season in full swing.

While clothing retailers saw sharp declines, ONS data revealed that food sales rose by 3.1% while total household goods sales grew by 1.6%.

ING economist James Smith said: “Despite lockdowns across most of the UK, the level of spending is still higher than where it was in August, and comfortably above its pre-virus level”.

UK economy performing better-than-expected

Since the COVID-19 pandemic ravaged the British economy, retail has been one of the better-performing sectors of the UK economy, which the BoE forecasts will contract by 11% in 2020.

The latest Gfk Consumer Confidence survey has also increased by 7 points in December to -26, reflecting the improving mood among UK consumers. The 15 point leap in consumer confidence on the future of the economy was a standout change, with the deployment of COVID-19 vaccines said to be the reason for growing optimism.

While the Bank of England made upward revisions to its forecasts for the economy in the final quarter of 2020, on Thursday, the monetary policy committee warned that post-lockdown restrictions could have a damaging effect on recovery heading into 2021.

Despite the looming risks of employment and rising unemployment levels in the UK, many analysts and economists have said that Chancellor Rishi Sunak’s furlough scheme has protected workers and helped to boost confidence.

Recent data also shows that consumers have saved notably more in 2020, which is raising hopes of a higher per-person spend at Christmas this year.

Chancellor Rishi Sunak announced that the Treasury would be extending the furlough scheme for another month to support the economy further in the new year. The furlough scheme, which was supposed to conclude in March, is now expected to end in April 2021.

Property market officials are also pressuring the UK government to extend the stamp duty holiday. Kate Bould, Managing Director of Index West Midlands, said: “with the possibility of a third lockdown being announced in 2021, the government should extend the SDLT holiday to not only help stabilise the housing market but protect the economy.”

She added: “If property purchases and sales slow down and eventually stall, an economic downturn will follow.”