As Q2 figures are released in the UK and US, the fluctuating economic recovery of both countries continues to have an impact on the retail sector. Although unemployment continues to fall, the feeble wage growth and growth in hours worked experienced by both countries has yielded varied results in sales.
The Bank of England’s governor Mark Carney has cited wage growth problems (which actually fell in the UK by 0.2 per cent, the first decline recorded since 2009) as a crucial stumbling block in his plans to raise the bank rate from its record current low of 0.5 per cent. Despite the sluggish wage growth, the employment rate rose sharply in Q1. Fears over the effect a raise would have on the fragile increase in consumer demand continue to plague the governor.
Consumer spending has been a crucial factor in the UK’s unexpected economic recovery in the last year with home furnishing retailers heralding strong sales, but overall growth remains uncertain.
In contrast, the US Commerce Department has reported the weakest retail sales performance in six months as improvements in sales of clothes and groceries have been offset by declines in department stores and electronics.
Just as in the UK, average weekly earnings fell 0.2 per cent in the last year to June in the US, even though there has been an increase in employment (200,000 jobs created in the past six months). As Stephen Stanley, chief economist at Pierpont Securities LLC, commented, “employment has picked up in recent months but you’re not seeing the growth in hours worked that would generate big increases in paychecks”. Ian Shepherdson of Pantheon Macroeconomics agrees, arguing that “consumers just don’t have the cash flow to finance sustained gains above 4.0 percent”.
In the UK, however, the British Retail Consortium reported that retail sales improved in July by 0.6 per cent from June and 1.3% from July last year. This growth is markedly improved when the food retail sector is excluded, which recorded its worst three-month average since records began in 2008.
As the ongoing price war continues between UK supermarkets, prolonged discounting is negatively affecting the profit margins of major supermarkets. Similarly, US department store Macy’s own discount campaign has not had the desired effect; designed to increase the number of shoppers, in practice it only served to erode profit margins. Although sales did rise by 3.4 per cent, this fell short of the projected 3.9 per cent.
Neverthless, Harm Bandholz – chief economist at UniCredit Group – has predicted that wage growth will follow this drop in unemployment, optimistically asserting that “the fundamentals for a pickup in consumer spending look very good”.