Widespread concerns about the effect of Brexit on GDP growth have so far, it seems, failed to materialise. The UK economy has grown far more quickly than expected since last June, with annual growth recently revised to 2%. But that could be about to change as soaring inflation begins to take its toll on the high street, with food inflation doubling in the three months to 2017.
In the immediate aftermath of the vote to leave the EU in June, GDP growth defied expectations largely thanks to more buoyant than expected retail sales. But that could be about to change. Inflation has risen from a modest 0.6% to 1.6% in December, with a heavily weakened sterling boosting input prices and translating to higher prices at the tills too.
It’s too soon to say whether this will take its toll over the longer term, with economists reluctant to repeat their (thus far incorrect) predictions of a post-Brexit economic slump. Spending on non-food items did, however, decline in February. At the same time, fears are increasing of an ever-growing consumer credit bubble, similarly to the lead-up of the 2008-09 financial crash.
Difficult outlook for the high street
Online retail growth has proved significantly stronger than physical sales, with a 3.2% jump in February. High street food, clothing and luxury retailers haven’t fared as well, as spending growth on these items declined by over the same period. Whether this is simply a temporary blip or the beginning of a serious downturn for these retailers remains to be seen. Brits still haven’t been reluctant to take a night out on the town, though; bars, hotels and restaurants emerged as the big winners at the turn of the year.
KPMG, which collects retail spending data in conjunction with the British Retail Consortium, said that consumer confidence does indeed appear to be declining. Barclaycard, meanwhile, which analyzes spending patterns on its credit cards with different types of businesses, said their data also suggests a difficult future for retailers. People are, they said, now increasingly restricting their spending to everyday items.
Sharp turnaround seems unlikely
The data casts doubt on a continued rise in GDP growth as the Government prepares to trigger Article 50; with mediocre growth in trade and investment, the UK economy has become increasingly reliant on retail sales. Many economists are also forecasting a further rise in inflation, likely weighing further on spending growth. But they’ve been wrong before – only time will tell.