(Bloomberg) -- Keir Starmer’s new Labour government suffered a double setback on Friday as figures for June showed UK retail sales fell more than expected and public borrowing overshot official forecasts.
The volume of goods sold in stores and online declined 1.2%, partially erasing a 2.9% surge in May, the Office for National Statistics said. A June budget overshoot left the deficit in the first three months of the fiscal year £3.2 billion higher than forecast by the Office for Budget Responsibility. The pound maintained earlier losses following the data.
The figures highlight the challenging outlook facing the new government, which came to power two weeks ago pledging to lift economic growth and fix Britain’s creaking public services.
The fall in retail sales was double the 0.6% drop expected by economists. The ONS blamed cooler-than-average temperatures, election uncertainty and low footfall, with clothing, furniture and department stores the worst affected.
It means the sector made no contribution to overall economic growth in the second quarter, with sales falling 0.1% during the period. While the weather has buffeted spending patterns in recent months, it’s a reminder to the prime minister that consumers remain in a cautious mood despite an easing of the cost-of-living crisis and the prospect of interest-rate cuts.
What Bloomberg Economics Says...
“UK retail sales failed to support growth in the second quarter. Spending fell back sharply in June as colder-than-average weather dented sales on the high street. While we expect sales to pick up in the coming months as real wages rise, the scale of the drop indicates consumers remain vulnerable.”
—Niraj Shah, economist. Click for the REACT
A key index by GfK published earlier Friday showed Labour’s landslide election victory had a muted impact on consumer sentiment this month, with confidence edging up just one percentage point, albeit to its highest level since 2021. Client strategy director, Joe Staton, said households were waiting to see “exactly how the UK’s new government will affect the wider economy and their personal finances.”
Money markets see a 40% chance of the Bank of England cutting interest rates next month, as policymakers balance signs of a weakening labor market with stubbornly high inflation in the services sector. Economists expect growth of around 0.5% in the second quarter, extending a recovery from last year’s mild recession.
The ONS said there was little anecdotal evidence of a boost to sales from the start of the UEFA European Football Championship in the middle of the month, barring modest spending on home-entertainment systems. Food sales, often a beneficiary of national sporting events, declined 1.1%. A bigger effect may emerge in July as England advanced through the tournament.
Cool weather at the start and end of June also dented demand for food, along with summer clothing and outdoor furniture, the ONS said.
“Despite a summer of sport and music events, falling sales in June suggests consumers remain cautious when spending money,” said Aled Patchett, head of retail and consumer goods at Lloyds Bank. “While some inflationary pressures may have eased for retailers, prices of certain commodities and raw goods remain stubborn, which could mean some challenges remain for the sector.”
Separate figures showed the challenging fiscal outlook facing Starmer and his Chancellor of the Exchequer Rachel Reeves. The budget deficit in June stood at £14.5 billion ($18.7 billion), more than the £11.6 billion forecast by the OBR, while the national debt remained at levels last seen in the early 1960s at 99.5% of GDP.
In a Bloomberg TV interview on Thursday, Reeves warned of “difficult decisions” ahead to fix the public finances, fueling expectations that she’ll announce revenue-raisers or curb spending plans to keep the UK on course to hit its key fiscal target to have debt falling as a share of the size of the economy in five years.
Borrowing in the first three months of the fiscal year was £3.2 billion above OBR forecasts at £49.8 billion, dealing a blow to any hopes of a budget windfall for the new government.
The soaring cost of welfare, funding for stricken local authorities and government spending on goods and services drove the increase in the year to date, offset in part by lower debt interest. On the revenue side, income and corporation tax receipts continued to see strong growth.
“The gap between borrowing and the Budget forecasts is small relative to the potential for future revisions and forecast errors but indicates the pressures to spend more facing the new Chancellor,” said Robert Wood, chief UK economist at Pantheon Macroeconomics. “The government borrowing plans Ms. Reeves has inherited are highly unrealistic because they rely on holding down public spending more than is plausible.”
--With assistance from Aline Oyamada.
©2024 Bloomberg L.P.
