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Europe Week Ahead (Feb 24-28): UK Retailers’ Hopes Rest on Clear Transition Path

By:

Senior Market Analyst at Interactive Brokers

Market participants in the week ahead will receive fresh gauges of UK consumer and business confidence, as uncertainties over Britain’s future relationship with the EU generally continue to pose challenges.

Conducting business in the UK remains contingent on a long list of material concerns, including the unfolding of Brexit and trade developments, as well as slowing global and regional growth.

Although the recent victory of UK prime minister Boris Johnson and his Conservative Party in the general election had essentially led to the formal withdrawal of the nation from the EU at the end of January 2020, several hurdles remain unresolved, including establishing a free trade agreement with the bloc ahead of a year-end 2020 deadline.

Following the central bank’s monetary policy decision in January, Bank of England (BoE) governor Mark Carney said that in the period since the June 2016 referendum on Brexit, business investment has been “very weak,” going from “the strongest in the G7 to the weakest.”

Carney acknowledged that the weakness has not only involved capital investment but also process investment, where businesses in certain sectors over the past year have had to “devote a lot of time to contingency planning,” adding that “there’s only 24 hours in a day and the time they spend on that is not time spent on expanding.”

Against this backdrop, the UK retail sector, which already contends with an increasing drive away from physical stores and towards online marketing and sales, also grapples with considerable concerns about how the UK’s departure may reshape the industry’s operations – especially concerning supply chains and the adoption of new regulatory requirements.

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Fearing the deleterious effects on the UK retail sector from the Brexit transition period, Kyle Monk, head of retail insights and analytics at the British Retail Consortium (BRC), said that it is “essential progress is made quickly in the upcoming EU trade negotiations otherwise the UK risks squandering any boost to consumer confidence.

“Without a comprehensive deal, food and other goods will face extensive tariffs, checks and delays at the border – raising costs and creating disruption for consumers.”

Moreover, household spending has suffered a recent slowdown as consumers grew increasingly cautious about Brexit-related uncertainties, despite enjoying a strong labor market, underscored by low unemployment.

Optimism Reigns Supreme

Overall however, shoppers seem to remain optimistic about their spending landscape – notably since the December election results lifted some uncertainties hanging over Brexit.

While retail sales purchase volumes fell 0.8% in the three months to January 2020 from the prior quarter, for example, they rose 0.9% month-on-month – for the first time since October 2019 – on the back of growth from both food stores (1.7%) and non-food stores (1.3%), according to the Office for National Statistics (ONS).

Other measures, such as a two-point increase in GfK’s Consumer Confidence Index (CCI) in January, as well as a 14-month high in the Lloyds Bank Business Barometer, have resurrected hopes that consumer spending and business confidence will continue to trend in positive directions.

Joe Staton, client strategy director at GfK, said that the latest figures concerning “our personal financial situation for the last and next 12 months are encouragingly healthy and positive, as is the improvement in our view of the wider economic picture for the UK.”

He continued that these signs are linked to the uptick in the jobs and housing markets, coupled with low headline inflation and interest rates, adding that if current trends continue, “we’d expect a return to positive headline scores soon.”

Meanwhile, Lloyds Bank Business Barometer, which averages the views of 1,200 companies on their business prospects and optimism about the UK economy, showed that overall business confidence in January rose for the fifth straight month — surging 13 points to 23%. Also, economic optimism spiked to 23% from 2%, an 18-month high, while concerns about the expected impact of the UK’s exit from the EU receded to the least negative level (-7%) since November 2018.

Lloyds Bank Commercial Banking senior economist Hann-Ju Ho said that after a “turbulent 2019, it is encouraging to see a solid rise in overall business confidence to start the new decade. These results, if sustained, could signal a stronger economic growth at the start of 2020, although risks to the central outlook remain.”

Retail Rings-Up More Misery

Despite the rosy sentiment expressed by the Lloyds survey, and contrary to the more upbeat mood found in GfK’s CCI, the retail industry appears to be set for a sustained period of misery.

According to the latest monthly CBI Distributive Trades Survey, retail sales volumes in January were flat for the third consecutive month, with no growth expected in February.

Anna Leach, CBI’s deputy chief economist, highlighted “modest” discretionary income growth, as well as the struggle to compete with digital disruption and the “cumulative burden” of policy costs, as the main impediments to growth in 2020.

Meanwhile, online shopping continued to shine, with internet sales up 46% from 18% month-over-month and is expected to tick-up a little further in February to 50%.

Leach also pointed out that while household spending is set to remain a key driver of GDP growth, slower growth in employment and real earnings will “act as a restraint.”

Households’ disposable incomes are expected to grow by 0.6% this year, which would be the weakest pace since 2016.

Leach added that although the underlying momentum in the broader UK economy “remains subdued at the start of 2020,” she continues to anticipate “a mild improvement over the course of the year.”

According to the CBI’s latest economic outlook, GDP growth is set to remain at a modest 1.2% in 2020, before picking up to 1.8% in 2021.

Economic Calendar

Investors will likely be paying close attention to how the UK retail sector and business investment will adjust to the potential impacts from Brexit, as uncertainties become clearer over the course of 2020.

In the very near-term, the economic calendar in the week ahead includes:

Tuesday, February 25

  • CBI Reported Sales – Distributive Sales (Feb)

Wednesday, February 27

  • GfK Consumer Confidence (Feb)
  • Lloyds Business Barometer (Feb)
  • Nationwide Housing Prices (Feb)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

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Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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