September’s slowdown in retail sales came as a surprise to some City analysts. But to others it was the not unexpected consequence of the recent sharp fall in consumer confidence combined with rising utility prices, less discounting, and the feeding through of higher interest rates to mortgages.
Nationwide Building Society’s consumer confidence index recovered slightly in September, from its dramatic slump in August, although it remains well below its two-year average and reflects uncertainty about the economy and jobs. Some 12% of consumers polled expect their income to be lower in six months’ time.
In a separate sounding on the mood of consumers for the European Commission, GfK NOP also found a slightly less pessimistic mood than in August, accompanied by a marginal improvement in the measure of whether now is the right time to make major purchases.
Official figures reveal that although demand for furniture rose by 3% in the year to September in volume terms, it was 2% lower than the previous month and slowed from an annual growth rate of 7%.
Overall, high street sales fell by 0.4% in September – the first monthly decline since January – and lowered the year-on-year rate of increase to 3.2%, from 4.4% in August. In the three months to September total sales volumes rose by 3.8% compared with the same time last year, but household goods stores saw demand increase by nearly 6% over the same period.
Discounting
Anecdotal evidence from the British Retail Consortium indicates that forward orders for furniture and floor coverings strengthened for some retailers but, although new ranges proved popular elsewhere, sales were still often driven by discounting.
Despite the drop in sales, prices on the high street are still on the increase, suggesting that shops have regained at least some of their pricing power. The headline retail price index, which includes mortgage payments, rose from 3.4% to 3.6% in September, although the government’s preferred measure – the consumer price index – eased from 2.5% to 2.4% but remained higher than the 2% target level.
The price of household goods had a large upward effect on the RPI, due largely to a 4.2% annual rise in furniture prices, particularly for bedroom furniture and leather sofas. It was driven by a 3.5% increase on the month and follows a yearly rise of 1.8% in August.
Prices of furniture at the factory gate rose by 3.5% in September, up from 2.4% the previous month, although UK manufacturers’ raw material cost increases were steady at 4.5%.
Construction activity growth eased slightly in September but nonetheless saw robust expansion, according to a survey of purchasing managers by the Chartered Institute of Purchasing and Supply. Increased work on commercial projects was the main driver of growth, but it failed to offset the first fall in civil engineering activity since June. Housebuilding showed little change from the previous month.
Optimism reaches high
Optimism about construction activity over the coming year reached a five-month high in September and was reflected in an increase in the purchase of construction materials and products to its strongest rate since March.
The Council of Mortgage Lenders says gross borrowing was up 7% in the year to September, at £29.5bn. This follows particularly strong housing demand and mortgage approvals in May and June, and adds weight to the view that the housing market is still booming.
The Royal Institution of Chartered Surveyors reports that enquiries from would-be house buyers rose for the 16th successive month, and adds that house prices increased at their fastest rate for four years in September.
Further back in the supply chain, new orders placed with construction firms in the three months to August rose by 10% compared with the same time last year, according to official estimates. Private housing orders fell by 6% and infrastructure orders dropped 21%, but orders for commercial projects rose by 57%.
And now – with a rise in interest rates widely expected in November, and uncertainty about the strength of the labour market and about wages and their impact on inflation – another increase early next year is becoming likely.