Investec: A winter recession looks likely
The slide in retail sales volumes in October, to the lowest since February 2021, shows a genuine weakening underway in the economy, warns Sandra Horsfield, economist at Investec.
Horsfield says today’s retail sales report has revealed “a distinctly glum autumnal picture”, with volumes down 0.3% in October, and 2.7% lower than a year ago.
In a research note, Horsfield says the weather is one factor:
Weather effects from the particularly wet second half of the month are said to have played a role in reducing footfall, on the heels of what had been an unusually warm September and early October.
This may well not only have deterred purchases of autumn/winter clothing ranges but kept consumers out of shops more generally.
But, the cost-of-living squeeze in persuading consumers to tighten their purse strings too, she points out.
The downgrade to September’s retail sales report (showing a fall of 1.1%, not the 0.9% first estimated), is another blow.
It could mean that the UK’s third-quarter GDP report, which showed the economy stagnated, is revised lower…
Horsfield says:
Initial estimates had suggested the economy just about avoided a contraction (at least after rounding) in Q3, but with releases such as today’s, it is possible that this changes in subsequent releases of GDP statistics.
In any case, we remain of the view that a winter recession looks likely, as higher interest rates gradually feed through and take their toll on household and business finances. That said, we also continue to expect the downturn to be mild as a moderation in inflation should help support real purchasing power.
Key events
Kiran Stacey
Today’s drop in UK bond yields will be welcomed in the Treasury, as it means the cost of issuing new debt (or rolling over maturing bonds) is falling.
It comes as Jeremy Hunt considers slashing the UK inheritance tax rate in next week’s autumn statement after economic forecasters told the chancellor he would have more money to spend thanks to rising tax revenues and falling borrowing costs.
Our political correspondent Kiran Stacey explains:
Hunt is weighing up big cuts to the tax people pay after inheriting wealth, paid for in part by better than expected government spending forecasts and by raising benefits by less than expected.
The chancellor had been expected to hold off from cutting taxes until next year as he and Rishi Sunak continue to focus on reducing inflation.
But after UK inflation fell further than expected last month and with Tory MPs clamouring for a pre-election giveaway, sources say the chancellor is open to the idea of doing it sooner.
Morgan Stanley are also warning that the UK is heading into recession, following this morning’s disappointing retail sales figures.
Their UK economist Bruna Skarica says it will be a mild recession, with rising real wages cushioning the impact of Bank of England interest rate rises:
We see a technical recession at the turn of the year. It is not a severe one – ~0.4% peak-to-trough – as improving real wage growth counters lagged impacts of BoE tightening.
Skarica says October’s retail sale report shows “fairly broad-based weakness”, explaining:
Food, clothing and furniture volumes all fell on the month, with particularly acute weakness in household goods sales.
Online sales volume ticked up a bit (0.8% in the month following a 2.3% monthly drop in September), so part of the overall miss might be to do with lower footfall due to the poor weather in the second half of the month.
But only a part. Zooming out, the three month/three month change in the volumes of retail sales is now at -1.1% – the consumer looks to be pulling back.
US government bonds are also rallying, pushing down the yield on 10-year Treasury bills to the lowest in two months, at 4.379%.
Investors are betting that the US Federal Reserve has finished raising interest rates, after US inflation fell to 3.2% this week, US retail sales dipped, and jobless claims rose.
The drop in UK government bond yields today comes with “all the roads pointing to the Bank of England being ready to cut next year”, says Neil Wilson of Markets.com.
Bond yields fall as investors bet on rate cuts
UK government bond prices are rallying, as investors continue to bet that interest rates will be cut soon as recession fears build.
The rise in prices is pushing down the yield, or interest rate, on UK government debt – a sign that inflation is expected to ease.
The yield on 10-year gilts has fallen to 4.05% this morning, down from 4.15% last night, and the lowest level since 22 May.
This yield has fallen in the last month, from over 4.7% in mid-October.
UK 10 yr bond yield – new lows
Yields in US and Europe has been falling on lower inflation figures and on expectation that the Central banks in US/Europe are done raising rates.$TNX $TLT pic.twitter.com/OAT2GGnsam
— Trading Ideas (@TradingIdeas9) November 17, 2023
Shorter-dated UK bonds are also strengthening, pushing down the yield on two-year gilts. That should lead to a drop in fixed-term mortgage costs (which are priced off these yields).
The yield of UK Government Bonds continue to drop.
UK 2 year, now at it lowest since 6th of June and about to cross down over 200 day moving average.
5 & 10 year bonds already below their 200ma.
Good for the markets. pic.twitter.com/glDw40IaaE
— Justin Waite (@SharePickers) November 17, 2023
Full story: Fall in retail sales in Great Britain signals high street recession
![Phillip Inman](https://www.businessfast.co.uk/wp-content/uploads/2023/11/Winter-recession-fears-for-UK-after-fall-in-retail-sales.jpg)
Phillip Inman
Retailers in Great Britain suffered a slump in sales in October as the impact of high borrowing costs and rising prices signalled a high street recession in the run-up to Christmas.
Bad weather also played a part in a 2.7% year-on-year fall in retail sales that the Office for National Statistics (ONS) said hit clothing and household goods stores the hardest.
Emphasising the severity of the downturn, the ONS said the month-on-month drop in October was 0.3%, much lower than the 0.3% rise economists polled by Reuters had forecast.
Figures for September were revised down to show sales dropped by 1.1% on the month, a sharper fall than the 0.9% first estimated. More here.
British Gas hiring 700 staff to help with winter heating pressures
Jillian Ambrose
British Gas is hiring over 700 new staff to join its customer service teams in Stockport, Leicester, Leeds, Edinburgh and Cardiff as the winter heating season begins, my colleague Jillian Ambrose reports.
The UK’s biggest energy supplier said the roles will be in place by the end of the year to help distribute its £100m support package for customers who are struggling to pay their bills.
Chris O’Shea, the chief executive of British Gas parent company Centrica, said many of its customers are still “struggling overall with the cost of living and need to speak to us for longer about their energy bills.”
British Gas is under pressure to prove that it has the best interests of its customers at heart after it emerged last winter that agents working on its behalf had broken into homes which were behind on their bills to fit pre-payment meters despite signs that young children and people with disabilities lived in the property.
Households can expect their energy bills to rise by 5% from January after analysts forecast a hike in the government’s energy price cap to an average of around £1,930 for the typical home.
Hopes that central bankers may have pushed interest rates to their peak are pushing stock markets higher today.
In London, the FTSE 100 index is 60 points higher, or 0.8%, at 7471 points, after a drop yesterday.
A drop in the oil price yesterday, to the lowest since July, is boosting hopes that inflation will continue to fall.
AJ Bell investment director Russ Mould says:
“The [FTSE 100] index was hurt by its big exposure to oil and gas yesterday as a big build in US inventories caused crude prices to plunge. The upside of this scenario is it further reduces inflationary pressures and underscores the idea that the rate hiking cycle has peaked.
“What’s helped in this regard is that Federal Reserve officials, while not exactly getting out the garlands and bunting and announcing a victory parade in the battle against inflation, are not really pushing back against the peak rates narrative either.”
New data from the ONS this morning also shows an easing in the cost of living squeeze, compared to a year ago (when inflation was peaking above 10%).
It found:
-
Around a half (52%) of adults reported that their cost of living had increased compared with a month ago. This is down from 77% a year ago (26 October to 6 November 2022).
-
Of those who reported their cost of living had increased compared to a month ago, 91% reported the price of their food shop had increased, 66% reported the price of their fuel had increased and 66% reported their gas or electricity bills had increased.
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Around 4 in 10 (38%) adults who pay energy bills, reported it being very or somewhat difficult to afford them, down from 47% saying this in the period 26 October to 6 November 2022.
Here’s a chart that shows, starkly, the impact of food price inflation in the UK.
Compared with 2019, spending at food stores is up by around 22%.
But volumes of goods taken home by shoppers is 4% lower than four years ago.
![A chart showing food store sales volumes and values](https://www.businessfast.co.uk/wp-content/uploads/2023/11/1700223828_222_Winter-recession-fears-for-UK-after-fall-in-retail-sales.jpg)
Investec: A winter recession looks likely
The slide in retail sales volumes in October, to the lowest since February 2021, shows a genuine weakening underway in the economy, warns Sandra Horsfield, economist at Investec.
Horsfield says today’s retail sales report has revealed “a distinctly glum autumnal picture”, with volumes down 0.3% in October, and 2.7% lower than a year ago.
In a research note, Horsfield says the weather is one factor:
Weather effects from the particularly wet second half of the month are said to have played a role in reducing footfall, on the heels of what had been an unusually warm September and early October.
This may well not only have deterred purchases of autumn/winter clothing ranges but kept consumers out of shops more generally.
But, the cost-of-living squeeze in persuading consumers to tighten their purse strings too, she points out.
The downgrade to September’s retail sales report (showing a fall of 1.1%, not the 0.9% first estimated), is another blow.
It could mean that the UK’s third-quarter GDP report, which showed the economy stagnated, is revised lower…
Horsfield says:
Initial estimates had suggested the economy just about avoided a contraction (at least after rounding) in Q3, but with releases such as today’s, it is possible that this changes in subsequent releases of GDP statistics.
In any case, we remain of the view that a winter recession looks likely, as higher interest rates gradually feed through and take their toll on household and business finances. That said, we also continue to expect the downturn to be mild as a moderation in inflation should help support real purchasing power.