today is Aug 19, 2022

Analysis: Retailers face long difficult summer, with consumer confidence at rock bottom

Larry Elliott

Larry Elliott

With consumer confidence at rock-bottom levels it hardly comes as a shock that retailers had a tough month in May, our economics editor Larry Elliott writes.

The real surprise was that the 0.5% drop in the volume of spending reported by the ONS was not worse.

GfK’s monthly survey of how consumers are feeling stretches back to 1974 and so includes some previous periods when times have been hard: the manufacturing wipe out of the early 1980s, the housing crash of the early 1990s and the global financial crisis of 2008 among them.

In all that time, consumers have never been as gloomy as they are now.

The reason for the pessimism is obvious: prices are rising a lot faster than wages, eating into spending power. Food sales have been especially hard hit as shoppers place self-imposed spending limits at supermarket check-outs.

Retail sales have been on a downward trend for the past year, but as Martin Beck, chief economic adviser at the Item Club has pointed out, initially the weakness was the result of consumers shifting spending from goods to services as lockdown restrictions were lifted.

But five falls in retail sales in the past seven months can’t be put down to a rotation effect. Consumers are not just being hit by higher prices of food: energy bills went up in April as did taxes. A long difficult summer for retailers looks inevitable.

UK retail sales
UK retail sales Photograph: ONS

Closing summary

The UK’s stock market is soaring as the week draws to a close, on hopes that central banks may not hike interest rates as rapidly as feared.

Perhaps ironically, signs that economic growth is cooling appears to be giving nervous investors some reassurance.

Commodity prices have dropped this week, business surveys have shown slower growth, and cash-strapped consumers are cutting back as confidence craters in the UK and the US.

That cocktail may ease inflationary pressures, and mean central banks don’t need to slam the brakes on quite so hard.

So with traders looking ahead, the FTSE 100 index is now up 2.5% or 172 points at 7194, its highest in around a week.

Speciality chemicals group Croda (+5.5%), veterinary medicine group Dechra Pharmaceuticals and equipment rental business Ashtead (+5.2%) are leading the risers.

Here’s today’s main stories:

Have a lovely weekend, we’ll be back on Monday. GW

Campaign calls for 1m UK consumers to stop paying energy bills

Alex Lawson

A campaign is urging 1 million UK consumers to stop paying their energy bills from October in protest at record price hikes.

Run by a group of activists who are operating anonymously for fear of repercussions from energy firms, the Don’t Pay campaign launched last Saturday and has already gathered 4,000 social media followers. They say they are hoping for a rerun of the poll tax protests that helped bring down Margaret Thatcher’s government when 17 million people refused to pay.

The manifesto, emblazoned in black and yellow on the group’s website, says:

“Millions of us won’t be able to afford food and bills this winter. We cannot afford to let that happen. We demand a reduction of bills to an affordable level. We will cancel our direct debits from 1 October if we are ignored.”

Another late development... US new home sales rose 10.7% last month, to a seasonally-adjusted rate of 696,000, beating forecasts.

The median sales price for a new home fell to $449,000 from a record high $454,700, which could signal some heat coming out of the market.

University of Michigan’s consumer confidence sentiment survey for May comes out lower than estimates at 50, as May's new home sales surges to 696,000. pic.twitter.com/0skNf5l0Xp

— Yahoo Finance (@YahooFinance) June 24, 2022

Stock markest are pushing higher, with the SP 500 index now up 2%, and strong gains in Europe as well.

US consumer confidence at record lows

US consumer confidence has hit its lowest level on record, mirroring the slump in morale in the UK this month.

The University of Michigan’s gauge of consumer sentiment has fallen to just 50 this month, down from May’s level of 58.4, and even worse than the initial reading of 50.2 earlier in the month.

The June figure is the lowest reading on record, going back to the late 1970s, and follows inflation hitting 40-year highs and record gasoline prices at the pumps.

Joanne Hsu, director of the survey, explains:

“Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession,”

“Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines,”

The Index of Consumer Sentiment plummeted from 58.4 in May to 50.0 in June, the lowest reading on record, according to preliminary data from the University of Michigan and Thomson Reuters. This was slightly lower than the preliminary estimate of 50.2. pic.twitter.com/byUOTA2SB8

— Chad Moutray (@chadmoutray) June 24, 2022

The Bank of England’s chief economist has played down concerns that quantitative easing stimulus programmes are to blame for soaring inflation.

In a speech titled “What did the monetarists ever do for us?”, Huw Pill argues that the UK’s elevated inflation is largely due to external shocks, rather than excess money growth in the past.

Pill is telling an audience at the Walter Eucken Institut in Freiburg, Germany:

Higher international energy and goods prices have raised UK inflation via the usual direct and indirect effects. The overshoot of the 2% inflation target is substantial largely because the magnitude of these external shocks has been substantial.

Aggregate GDP is only now reaching pre-pandemic levels, lending credence to the view that it is weakness in supply rather than strength in demand that is driving the current strength of inflation.

Given the tightness of the UK labour market and perceived strength of pricing power in large parts of the corporate sector, the threat exists that higher headline inflation leads to second round effects in prices, wages and costs that exacerbate the magnitude and, crucially, the persistence of the target overshoot.

Bank of England chief economist Huw Pill talks monetarism at Germany's Walter Eucken Institut - but says it's not a signal of a new policy stance at the BoE! pic.twitter.com/F2s3KqqRxe

— David Milliken (@david_milliken) June 24, 2022

And channelling Life of Brian, Pill concludes:

I doubt that monetarism will be (re) embraced by either the academic or central bank communities in the coming years. But – just like the Romans in the famous Monty Python sketch – maybe our understanding of how the monetary policy transmission mechanism has, does and will work owes more to them than we typically care to admit.

If you’re looking for a meaty Friday afternoon read on monetary policy, the speech is online here.

Interesting how Pill spells out that the BoE's inflation and growth models essentially take as given that inflation expectations remain well-anchored - so policymakers have to be especially vigilant if they're not pic.twitter.com/JBj2xU3uN5

— David Milliken (@david_milliken) June 24, 2022

UK airlines aren’t the only ones strugging to serve customers this summer.

Deutsche Lufthansa is canceling a total of 3,100 flights after a wave of coronavirus infections worsened staffing shortages, adding to Europe’s travel chaos as the crucial summer vacation period gets under way.

Bloomberg has the details:

Germany’s flagship airline on Friday announced it will scrap 2,200 domestic and European routes in July and August, on top of 900 cancellations unveiled earlier this month.

That’s around 4% of the carrier’s capacity during that period, according to a spokesperson. Lufthansa fell as much as 3.4% in Frankfurt.

The floor at the New York Stock Exchange in New York.
The floor at the New York Stock Exchange in New York. Photograph: Seth Wenig/AP

Stocks in New York have opened higher, as Wall Street shakes off some of last week’s fears over rising interest rates.

The SP 500 index of US stocks has jumped by 1.2%, or 46 points, to 3,842 in early trading.

The Dow Jones industrial average of 30 large companies has gained 1%, while the tech-focused Nasdaq Composite is 1.5% higher.

Markets have recovered some ground in the last few days, after their worst week since March 2020.

It seems that fresh signs of economic slowdown have cooled fears about aggressive rate hikes from central bankers. With commodity prices down this week, price pressures could be easing, while the latest PMI surveys of purchasing managers have signalled demand has been tailing off.

Neil Wilson of Markets.com explains:

Recession fears mean the market has dialled back its expectations for just how the far the Fed will go, which is helping growth stocks to mount a defence

PMIs are declining and lower commodity prices has the market more focused on slowdown than searing inflation, which seems on-balance net positive for stocks.

🇺🇸 U.S. Opening Bell 🇺🇸

📈 Nasdaq Comp gained 119.12 points, or 1.06%, to 11,351.31

📈 SP 500 opened higher by 26.02 points, or 0.69%, at 3,821.75

📈 Dow rose 169.58 points, or 0.55%, at the open to 30,846.94 pic.twitter.com/UAvYBoOYDi

— PiQ  (@PriapusIQ) June 24, 2022

Strikes threatened at largest exam board

Richard Adams

Richard Adams

A general view of pupils sitting an exam.
Photograph: David Jones/PA

Unions say A-level and GCSE results may be disrupted by strike action being threatened at AQA, England’s largest examination board, after unions rejected a new pay offer, our education editor Richard Adams reports.

Unison is currently balloting 160 staff at AQA over industrial action this summer while Unite is also considering a ballot, although a spokesperson for AQA said there was “no chance” of exam results being delayed because many of the staff being balloted were not directly involved in exam marking.

The unions say staff have already rejected a 3% pay offer, while talks over the dispute through the conciliation service Acas failed to reach agreement.

Lizanne Devonport, Unison’s north west regional organiser, said:

“No one wants to cause disruption to students and teachers in the first summer back in exam halls since the pandemic but the employees feel like they’ve been left with no choice.

AQA must come back to the negotiating table, make a serious offer and stop threatening its dedicated staff.”

AQA said its pay offer included additional increases for lower-paid staff, so that the average pay rise would be 5.6%.

But the unions say that their members have endured years of below-inflation pay settlements, and claimed that AQA’s current offer involves “fire and rehire” of staff accepting new conditions.

Earlier this week, leaders of the country’s largest teaching union say they will ballot their members on strike action later this year unless the government agrees to an “inflation-plus” pay rise.

The closed Underground entrance at Waterloo Station earlier this week, during strike action by Tube and railway workers in London.
The closed Underground entrance at Waterloo Station earlier this week, during strike action by Tube and railway workers in London. Photograph: Anadolu Agency/Getty Images

The prospect of a summer of strike action has risen further today, as London Underground staff in the RMT union voted to continue with strikes in a dispute over pensions and job cuts.

More than 90% of the union’s members on the tube who voted, on a 53% turnout, backed continuing industrial action.

The RMT was legally required to obtain support to renew its mandate for strikes, after the latest 24-hour stoppage on Tuesday closed virtually all tube services in the capital.

Crude oil prices have risen today, with Brent crude up over $2 per barrel at $112.

That still leaves oil down for the week, though, as fears of recession hit commodity prices. That ought to feed through to petrol pumps, although the weaker pound has made oil imports more expensive too.

Craig Erlam, senior market analyst at OANDA, says slowdown concerns could push oil lower:

The prospect of a recession has made waves across financial markets and commodities haven’t been immune. Oil prices have undergone quite a significant correction over the last couple of weeks as traders adapt to the increased recession risks, one of the few things that could partially address the imbalance in the market.

Oil prices are paring losses at the end of the week but a little more two-way price action may be on the cards. Risks remain more tilted to the upside as a result of the tightness in the market but if we continue to see recession risks rise around the world, that could change.

𝐃𝐚𝐢𝐥𝐲 𝐌𝐚𝐫𝐤𝐞𝐭 𝐈𝐧𝐬𝐢𝐠𝐡𝐭 Growing fears of a potential incoming recession caused by hawkish policy conducted by numerous central banks is providing downside to the Brent crude benchmark. Though tight global oil supply is offsetting any downside.#UtilityInsights pic.twitter.com/5M87QCJBOP

— Inspired PLC (@InspiredPLC) June 24, 2022

Philip Oltermann

Philip Oltermann

German consumers could face a tripling of gas prices in the coming months after Russia’s throttling of deliveries to Europe, a senior energy official has said.

Moscow reduced the flow of gas through the Nord Stream 1 pipeline by 40% last week, citing technical reasons that Berlin dismisses as a pretext, prompting a four- to sixfold rise in market prices, said the head of Germany’s federal network agency, Klaus Müller.

Such “enormous leaps in price” were unlikely to be passed down entirely to consumers, Müller said, but German citizens had to brace themselves for dramatically rising costs.

He told public broadcaster ARD:

“A doubling or tripling is possible.”

Here’s the full story, by our Berlin correspondent Philip Oltermann:

As well as worrying German households, this won’t help business morale recover from its fall this month (see earlier post)

Pakistan imposes ‘super tax’ in effort to get IMF loan package moving

Pakistan’s government is imposing a one-off ‘super tax’ on its largest companies, in an attempt to restart stalled negotiations with the International Monetary Fund .

Finance minister Miftah Ismail said today that an extra one-time 4% tax will be levied on all industry for one year, to raise 400 billion Pakistani rupees (£1.5bn). Large-scale industries willl face a 10% super-tax.

Pakistan hopes the move will help unlock a new tranche of IMF funds which are needed to avert a balance of payment crisis, as rising food and fuel prices push it into economic crisis.

Ismail told parliament this today that:

“Let me share this good news that this country isn’t heading toward a default anymore.

“We’ve taken very difficult decisions.”

The 10% tax will be levied on 13 big industries, companies and corporations, including sugar, steel, cement, oil and gas, fertilizer, cigarettes, chemical, automobiles, banks, textile, LNG terminals and beverages, which have earnings exceeding 300 million Pakistani rupee

Their tax rates will go from 29% to 39%,” Ismail tweeted:

Just to clarify: the super tax of 4% will be applicable to all sectors. But for the specified 13 sectors, another 6% will be added for a total of 10%. So their tax rates will go from 29% to 39%. This is a one-time tax needed to curtail the previous four record budget deficits.

— Miftah Ismail (@MiftahIsmail) June 24, 2022

The news sent shares tumbling, with the benchmark Karachi 100 index down 4% - on a day when global markets are generally higher.

Earlier this month, a minister in Pakistan’s newly elected government appealed to the nation to drink less tea to help save on imports -- a call which was not warmly received.

Copper isn’t the only metal that had a bad week (see earlier post)

Other industrial metals also tumbled, with nickel down around 13% this week and tin 25%, its biggest weekly slump since at least 2005.

Fears of an economic downturn are hurting commodity prices, which had boomed earlier this year, driving up inflation.

“There is a risk of further losses,” said independent analyst Robin Bhar.

“A sharp economic slowdown or recession seems to be on the cards.”

Analysis: Retailers face long difficult summer, with consumer confidence at rock bottom

Larry Elliott

Larry Elliott

With consumer confidence at rock-bottom levels it hardly comes as a shock that retailers had a tough month in May, our economics editor Larry Elliott writes.

The real surprise was that the 0.5% drop in the volume of spending reported by the ONS was not worse.

GfK’s monthly survey of how consumers are feeling stretches back to 1974 and so includes some previous periods when times have been hard: the manufacturing wipe out of the early 1980s, the housing crash of the early 1990s and the global financial crisis of 2008 among them.

In all that time, consumers have never been as gloomy as they are now.

The reason for the pessimism is obvious: prices are rising a lot faster than wages, eating into spending power. Food sales have been especially hard hit as shoppers place self-imposed spending limits at supermarket check-outs.

Retail sales have been on a downward trend for the past year, but as Martin Beck, chief economic adviser at the Item Club has pointed out, initially the weakness was the result of consumers shifting spending from goods to services as lockdown restrictions were lifted.

But five falls in retail sales in the past seven months can’t be put down to a rotation effect. Consumers are not just being hit by higher prices of food: energy bills went up in April as did taxes. A long difficult summer for retailers looks inevitable.

UK retail sales
UK retail sales Photograph: ONS

Petrol and diesel prices reach new records again

Petrol and diesel pumps are seen at a Shell petrol station in Portland, United Kingdom.
Petrol and diesel pumps are seen at a Shell petrol station in Portland, United Kingdom. Photograph: Finnbarr Webster/Getty Images

UK motorists continue to be hit by record fuel prices at the pumps, as hopes of an end to rising prices are dashed.

The average price of petrol hit 190.22p yesterday, while diesel also moved up another half a penny to 198.46p, closing on the £2 per litre mark.

Petrol across the UK averaged 190.22p a litre yesterday to pass yet another record-breaking milestone along a trail of pump price misery. Yet, wholesale prices feeding through to retailers have been falling for more than a fortnight, notes the AA.

— simon read (@simonnread) June 24, 2022

With both fuels once again setting new records, full tanks now cost £104.62 and £109.15 respectively (based on a typical 55-litre family car).

RAC fuel spokesman Simon Williams calls it “another miserable milestone” -- and criticises retailers for not passing on falling wholesale petrol prices.

“The cost of petrol at the pumps should really have stopped rising by now and should in fact be going into reverse. For some strange reason, the supermarkets continue to push unleaded higher very much against the trend on the wholesale market.

Drivers have every right to be angered by this. While there is no doubt wholesale costs increased dramatically a few weeks ago this is not the case now, so pump prices must start to fall for fuel retailers to retain credibility with their customers as well as not attracting the negative attention of the Competitions and Markets Authority.”

The CMA began a “swift high-level review of competition in the fuel retail market” this month, after being urged to investigate the sector by business secretary Kwasi Kwarteng.

The AA reported earlier this month that wholesale petrol costs had fallen from their peak, which raised hopes that rising petrol prices might “grind to a halt”.