John Lewis and Next became the latest retailers to warn of a consumer spending slowdown on Thursday. The slump could have big consequences for the UK economy.
Major UK retailers John Lewis and Next became the latest shops to warn of a slowdown in consumer spending on Thursday, in yet another sign of a serious slowdown in household spending that could be disastrous for the UK economy.
John Lewis Group, which owns the eponymous department store and upmarket supermarket Waitrose, on Thursday warned that future profits are likely to be hit by the current "difficult market."
Chairman Sir Charlie Mayfield says in a statement: "We expect the headwinds that have dampened consumer demand and put pressure on margins to continue into next year."
The warning came as it reported a 53% fall in profits last year, as weak demand, currency fluctuations, and big investment in reorganizing its business hit the bottom line.
High Street stalwart Next, meanwhile, managed a profit upgrade — but only because it was too pessimistic about its prospects at the start of the year. Half-year results show sales at its retail stores fell by 8% and operating profit was down 33%, hardly a reassuring long-term indicator.
"The wider economic environment, clothing market and High Street look as challenging as ever, and we do not underestimate the task of managing our stores through a period of prolonged negative like-for-like sales," Next says in its statement.
Richard Hyman, an independent retail analyst, told Business Insider the warnings are particularly worrying as "John Lewis and Next are among our very best run, strongest retail brands."
The retailers join a growing list of shops, restaurants, and leisure brands that have warned about a downturn in UK consumer spending. Other companies that have issued similar warnings in recent weeks include:
All of this points to a serious slowdown in consumer spending, with 2017 set to be the worst year for consumer spending since 2013.
The cause of the current slump is widely agreed to be the collapse in the pound against the dollar and euro following last year's Brexit vote. This has pushed up prices in shops due to higher import costs.
Why are we only feeling the effects now? Most businesses agree on contracts for goods and services in advance to hedge against any currency fluctuations but these hedges have begun to expire, meaning the rising price of imports has begun to filter through to prices on shelves.
Inflation is currently running at 2.9%, well above wage growth, meaning UK shoppers are feeling a squeeze on their incomes. As a result, they are cutting back on "discretionary" spending — anything non-essential.
More evidence supporting this is the fact that one of the only areas that looks to be weathering the storm is the supermarket sector — Morrisons on Thursday reported 4.8% rise in revenues so far this year. Food prices are rising but people need to eat so cut back on things like going out to make sure they can afford the weekly shop. (Online sales are also rising but from a much lower base.)
Hyman told Business Insider: "Recent consumer spending has been buoyed by credit and PPI payments. Both sources are drying up year-on-year, and we are seeing a progressive softening of demand, while cost growth is materially outpacing sales growth. Things must get worse before they can get better."
The Bank of England has forecast inflation to peak at around 3% this year before falling and this would hopefully ease the pressures on both the economy and consumers.
However, Oliver Harvey, a macro strategist at Deutsche Bank, said in a recent note: "Is the UK consumer over the worst? We don't think so. The risks are also shifting away from a real income shock towards other drivers of demand."
This could be disastrous for the UK economy. Over 60% of all economic growth in Britain comes from people blowing their wage packet on everything from groceries and meals to new clothes and cinema tickets.
The one upside? Fabrice Montagne, an economist at Barclays, said in a recent note: "The [spending] slowdown will be only gradual and the UK should avoid any consumption driven recession despite negative real wage growth."
That's something, I suppose.