People carrying shopping bags in Bournemouth

Pound sinks to 37-year low, as consumers feel the squeeze

Image credit: Andrew Matthews | PA Wire/PA Images

The UK pound has hit a new 37-year low against the US dollar as new official retail figures painted a bleak picture of the UK’s economy and consumers continue to struggle with rising energy bills and precarious employment.

Sterling dropped below $1.14 for a few hours on Wednesday morning, pushing it below recent lows and taking it to its worst and lowest position since 1985.

The drop came after newly released retail figures showed a drop of 1.6 per cent in August, compared to the 0.5 per cent fall that economists had optimistically predicted.

“This morning’s retail sales in the UK continued to show a deteriorating consumption picture in the UK, which emerged more from the continuation of a steady downtrend from last summer rather than the single grim data point in a rather volatile series,” said Francesco Pesole, a currency expert at ING.

“This has been the last important piece of data before the Bank of England meeting on Thursday and has hit the pound this morning.”

The pound regained some ground in the early afternoon on Wednesday, but was still trading down around 0.5 per cent against the dollar, buying just over $1.14. The pound also lost 0.3 per cent against the euro, trading at a little over €1.14.

Sterling has been weak against the dollar for months, largely because of the strength of the US currency. The euro has also been at multi-decade lows against the dollar.

Coincidentally, the latest fall of the pound came on the 30th anniversary of Black Wednesday, when the UK had to withdraw from the European Exchange Rate Mechanism (ERM). The ERM was designed to ensure that the exchange rates between European currencies remained stable.

Governments and central banks had to ensure that their currency did not fluctuate by more than 6 per cent from their European neighbours. The UK failed to meet this target.

At that time, the value of the pound was dropping quickly and Prime Minister John Major's Conservative government spent billions trying to prop it up.

However, it could not keep up with currency traders desperate to sell pounds and the government eventually had to pull out of the ERM, something which damaged the Conservative Party’s reputation for handling the economy for years.

Meanwhile, in tandem with the sinking pound, it has been reported that consumer spending was also significantly down in August, with people buying fewer items and spending money less freely.

Both the value and the volume of sales in the UK’s retail sector dropped in August for the first time since the end of 2021, as shoppers tightened their belts in the face of soaring prices and the dreaded prospect of runaway energy bills.

The decline in retail sales volumes – down by 1.6 per cent in August – further built on a downward trend that originally started around a year ago after Covid-19 restrictions were lifted for the hospitality sector.

Since that time, volumes have fallen as people switched from buying beer and food in shops to going to local pubs or restaurants. However, the amount that people spent at retailers had risen by 8 per cent between July 2021 and July 2022, before dropping by 1.7 per cent in August.

Rosalind Hunter, a partner at consultancy Simon-Kucher & Partners, said: “The figures released this morning show both value and volume declining for the first time this year, indicating that consumers are voting with their feet and switching to cheaper alternatives in a drive to keep household finances afloat.”

The Office for National Statistics (ONS) said that food shops, non-food shops, online retailers and fuel sellers had all registered declines in August – the first time since July 2021.

Non-store retailers – largely online sellers – saw volumes drop by 2.6 per cent in August, giving back some of the sales ground they had gained during the pandemic. Sales in this sector remain a quarter higher than before lockdowns began.

Lynda Petherick, retail lead at consultancy Accenture, said that retailers will be worried about the figures from the unusually warm August.

“With a difficult winter to come, it will come as a worry to retailers that shoppers have already reined in their spending despite the hot summer,” she said.

“The sombre atmosphere in the UK this week and news of slow economic growth will be adding to the sense of concern among retailers as the weather gets colder.

“Rising costs remain front of mind, and brands will be doing all they can to minimise outgoings and protect their margins for the months ahead.”

Sounding a more positive note, Pantheon Macroeconomics expert Samuel Tombs, speaking to the PA news agency, said that he believes that August’s figures will be this year’s “nadir”.

Tombs added: “Looking ahead, we doubt that the additional public holiday for the Queen’s funeral on Monday, and associated shop closures, will materially dampen retail sales in September. People simply will shop online or visit shops later in the month instead.

“Moreover, the government’s decision to freeze consumer electricity and natural gas prices for the next two years at 27 per cent above their current level should foster an improvement in consumers’ confidence and a partial recovery in households’ real disposable incomes over the coming quarters.

“Accordingly, we expect August’s retail sales figures to be this year’s nadir and a consumer-led recession to be narrowly avoided this winter.”

Tempering this optimism, the ONS has revealed that 48 per cent of adults said they were finding it “very or somewhat difficult” to afford their energy costs, according to an ONS survey conducted between 31 August and 11 September.

This represents an increase in concern expressed a fortnight earlier, when 45 per cent said they were struggling with energy bills.

Liz Truss' new government has promised support for UK households, pledging to cap energy bills at £2,500 from October, including a £400 rebate to be paid in six instalments.

This promise shaves approximately £1,000 off the projected cost of the average energy bill, following industry regulator Ofgem's announcement that bills were due to rise by 80 per cent to £3,549.

ONS's fortnightly cost-of-living survey also revealed an increase in concerns from consumers over their regular spending. It showed that 82 per cent of adults reported “being very or somewhat worried about rising costs of living” in the past two weeks, edging up from 81 per cent a fortnight earlier.

This compares unfavourably with the 74 per cent of households who expressed a similar sentiment back in May.

Around a quarter of adults – 26 per cent – also said they are unable to save as much as usual, when asked about the current state of their household finances.

The economic mood of the nation is being compounded by the squeeze on many working people's wages, with four out of five low-paid workers saying that the cost-of-living crisis is the worst financial period they have ever faced, according to new research from the Living Wage Foundation.

More than half of the 2,000 workers surveyed said they have used a food bank over the past year, with many paying more visits in recent months.

The Foundation said almost half of low-paid workers now regularly skip meals and nearly a third are unable to heat their homes due to financial reasons.

Research has shown that almost a quarter of all workers have also had to take out a payday loan to cover essentials, the report stated.

Living Wage Foundation director Katherine Chapman said: “Everyone is feeling the pressure from soaring inflation, but our polling shows that low-paid workers are being hit harder than most, with well over half using food banks in the last 12 months.

“These shocking findings bring to life what it’s like to be paid less than a 'Real Living Wage' during a cost-of-living-crisis. It’s more important than ever that those employers who can, step up and provide a wage based on the cost of living, joining over 11,000 Living Wage employers across the UK.”

The Living Wage Foundation will next week announce new rates for the voluntary Real Living Wage, which is higher than the statutory minimum.

The current rates set by the foundation are £11.05 an hour in London and £9.90 outside the capital, compared with the statutory adult rate of £9.50.

In more bad news for jobs, business advisory firm BDO has said that the labour market is at a “turning point”, with recessionary fears expected to put downward pressure on employment as hiring intentions start to fall.

This would signal an end to 10 months of positive hiring intentions by employers, following a dip in productivity and growing fears of a recession, BDO's report said.

Soaring energy costs have added to a decline in business output and productivity, the report added, leading to a fall in confidence among companies.

Kaley Crossthwaite of BDO said: “We’re already seeing the impact of a challenging environment, with many businesses forced to make cuts and in some cases consider whether the business will continue to be viable.

“Soaring energy costs and inflationary pressures are headwinds we can expect to become more severe in the coming months, exacerbating the economic and political uncertainty both firms and consumers feel this winter, particularly as we await the first signs of a fall in employment figures and a recession approaches.”

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