BREXIT BRIEFINGS 6: UK Showing Continued Post-Vote Resilience

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KEY POINTS

This is the sixth report in our Brexit Briefings series, which continues to analyze the impact of the Brexit vote on the UK’s economy, consumer health and retail sales. These are five of the latest takeaways:

  • Retail sales were strong in July, buoyed by increased tourist spending. Tax-free shopping by foreign visitors in the UK increased by 7% year over year during the month.
  • UK unemployment claims declined in July, and the country is currently close to the level of full employment.
  • The value of UK infrastructure-spending contracts dropped by 23% year over year in July. The decline reflects public and private sector investment being put on hold as a result of Brexit uncertainty.
  • Manufacturing exports increased to a two-year high in July, likely boosted by sterling depreciation. However, sterling weakness is a double-edged sword, as it drives exports, but also increases costs and prices for manufacturers.
  • It appears that the UK housing and commercial real estate markets are softer, but that they remain stable.

The UK’s vote to leave the European Union (EU) remains top of mind among businesses in the UK and elsewhere, even though it will be some time before the effect of the Brexit vote can be fully understood and digested.

We are publishing a Brexit Briefings series of regular reports that analyze the impact of the Brexit vote on the UK’s economy, consumer health and retail sales. This is the sixth report in our series, and it wraps up some of the latest available data points:

  • There have been only a few conclusive data points published from July or early August that enable commentators to draw any preliminary conclusions.
  • Thus far, no doom or disaster scenario has materialized, and the UK economy will likely avoid a hard landing.
  • Some economic analysts have been surprised by the resilience of a number of economic indicators. It remains to be seen whether the UK economy will continue to show stability.
  • Our main impression is that consumers appear to be more confident than businesses are so far. Retail sales figures for July were strong, benefiting from higher tourist spending and favorable weather.
  • Data on business activity have been limited. Industrial production and trade figures for July will be published in early September. The Office for National Statistics (ONS) reported a drop in the value of public and private sector infrastructure spending, and commercial real estate activity seems to be experiencing softening trends.

Strong July Retail Sales

The ONS reported that UK retail sales increased by 3.6% year over year in July, defying some predictions that consumer spending would slump following the Brexit vote. The ONS release marks the first monthly retail sales data published since the vote. The July retail sales figure was a marked improvement from a 1.2% increase in June and was well above the 12-month average of 1.7%.

Clothing-store-sales declines decelerated in July and strong growth was reported at footwear specialists and department stores/mixed-goods stores. Clothing retailers showed sequential improvement, with July sales falling 1.1% versus a decline of 7.6% in June.

UK Internet sales increased by 17.3% year over year in July, up from 15.9% growth in June. Online clothing and footwear specialists’ sales bounced back, but the segment’s growth rate remained well below that of total e-commerce. Household goods stores continued to lead growth.

Retail sales were helped by favorable weather patterns and Rio 2016 Olympics viewing, as well as by higher tourism levels, with the weaker pound contributing to tourist spending and “staycationing” by Brits.

Do-it-yourself retail giant Kingfisher reported a 7.2% same-store sales increase in its UK and Ireland business for the second quarter, ended July 31, 2016. Kingfisher stated that it has not witnessed a clear impact on business demand following the Brexit vote.

Swiss watch sales in the UK increased by 13% year over year in July, the category’s strongest result since November 2015, according to the Federation of the Swiss Watch Industry. The UK and Italy were the only two countries to see positive category growth during the month. Sales were likely boosted by the weak pound. However, the benefit may not last long, as watch manufacturers may raise prices in the UK to adjust for the price differential with other global regions.

Brexit Briefing 6_03The consensus view is that the pound will continue to trade at its current, depreciated level, or weaken further, due to two factors: the Bank of England will likely continue to implement stimulatory easing policies to avert economic deterioration, and the US Federal Reserve is considering hiking interest rates, which encourages elevation of the US dollar.

Strong July Grocery Sales

According to Nielsen, the value of UK grocery sales increased by 0.9% in the four weeks ended August 13, 2016, marking the best result since November 2013 (excluding the Easter and Christmas periods). Sales volumes grew by 1%, their biggest increase since March 2015.

Shopper Footfall Improving

Overall retail shopper footfall (traffic) declined by 0.4% in July, an improvement from the 2.8% decline seen in June. In July, traffic on high streets recovered from soft June patterns to outperform traffic in shopping centers and retail parks, according to the British Retail Consortium and Springboard, a footfall-measurement firm.

High-street traffic benefited from more favorable weather patterns in July, end-of-season discounting and tourism, as footfall increased by 0.3% year over year, a clear improvement from the 3.7% decline recorded for high streets in June.

Retail parks and shopping centers both witnessed year-over-year traffic declines, of 0.3% and 2%, respectively, during the month.

Tourist Visits and Spending Booming

Tax-free shopping by foreign visitors in the UK increased by 7% year over year in July, according to Global Blue, a shopping-tax-refund company. The largest increase in spending was reported by Japanese tourists, whose spending was up 96% year over year, followed by Indonesians, whose spending increased by 88% year over year. The average amount spent by Chinese and American tourists increased by 13% and 22% year over year, respectively. Chinese tourists spent the largest amount in the UK in July; their spending totaled 32% of all foreign visitor spending. American tourists’ spending amounted to 7% of the July total. The average Chinese tourist spent £840 and the average American tourist spent £734.

Similar tourist spending patterns were confirmed in London’s West End by the New West End Company, which serves as a business voice for the area’s retailers. The company’s CEO stated that tourists looking to cash in on the weak pound have helped West End retailers.

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London’s Westfield shopping centers also reported increases in foreign tourist visits and spending in July. The average international spend at both Westfield centers increased by approximately 60% year over year.

Budget airline Ryanair disclosed that 20% more Americans and 10% more Chinese tourists traveled from continental Europe to the UK on its airline this summer. 

Unemployment Remains at Record Low

According to the ONS, unemployment benefits claims declined in July, falling by 8,600, to 736,300. UK unemployment currently stands at 4.9%, its lowest rate since 2005.

Thus far, the labor market is displaying resilience, although the Bank of England forecast that unemployment will increase to 5.5% as a result of the Brexit vote. The ONS will publish more detailed figures in September, which will shed more light on the vote’s impact on hiring and employment.

Business Activity Indicators Mixed

The value of UK infrastructure-spending contracts in July dropped by 20% month over month and by 23% year over year, according to Barbour ABI, the construction consultancy that supplies data to the ONS. The decline reflects public and private sector investment being put on hold as a result of Brexit uncertainty. There is mounting pressure on Prime Minister Theresa May to increase infrastructure spending, particularly given current, record-low borrowing costs.

The BBA, the leading trade association for the UK banking sector, stated that borrowing by nonfinancial companies increased in July, reversing a slight fall in the run-up to the Brexit vote in June.

Brexit Briefing 6_01According to the Confederation of British Industry, manufacturing exports increased to a two-year high in July, likely boosted by sterling depreciation. However, the BBA stated that sterling weakness is a “double-edged sword,” as it drives exports, but also increases costs and prices for manufacturers.

Falling business confidence would likely lower investment and result in lower job growth, lower wages and a housing-market slowdown.

UK Housing and Commercial Property Markets Cooling

It appears that the UK housing and commercial real estate markets are softer, but that they remain stable. Estate agency Countrywide is forecasting that UK house prices will increase by 2.5% in 2016, decrease by 1% in 2017 and rebound slightly, by 2%, in 2018. The agency is forecasting that London will see the greatest decline in house prices, with the top end of the market most affected. Prime Central London house prices are expected to fall by 6% in 2016, stay flat in 2017 and then recover, increasing by 4%, in 2018. Greater London house prices are expected to decline by 3.5% in 2016, fall a further 1.25% in 2017 and then grow by 2% in 2018.

Countrywide stated that it has already seen some evidence of the Brexit vote’s impact, such as the ratios of asking to achieved prices decreasing in most parts of the UK. Furthermore, the National Association of Estate Agents stated that the number of homebuyers in July had decreased by a third and that the number of sales made to first-time buyers had declined by 5% from June. In July, eight out of 10 properties were sold below the original asking price.

On the flip side, a weakened pound could support foreign buyer interest. Record low mortgage rates following the Bank of England’s interest rate cut should also provide an incentive to homebuyers.

Publicly traded homebuilder Persimmon reported that it has seen robust customer demand since the Brexit vote, marked by an increase in potential buyers visiting its sales sites.

According to HM Revenue & Customs, the UK’s tax, payments and customs authority, UK housing-market activity remained steady month over month in July. Approximately 94,550 homes were purchased during the month, down 0.9% month over month and down 8.3% year over year.

The number of UK nonresidential properties purchased in July declined by 1.7% year over year, compared with a 4.7% increase in the first half of the year. The July figure marks the first year-over-year decline since April 2013.

The number of new home loan approvals in July declined to the lowest level in 18 months, according to the BBA. Apart from Brexit uncertainty, some of the predicted slowdown is also due to stamp duty and expectations of smaller capital gains following several years of double-digit price growth. In London, demand and high-end home prices had already started to cool prior to the Brexit vote.

Despite some better-than-expected economic data points, many economic forecasters still expect the UK economy to weaken in the second half of 2016. The housing market is often one of the first areas of the economy to experience a slowdown.

KEY TAKEAWAYS

Economic and business surveys conducted since the Brexit vote in June have revealed a mixed picture of UK economic health, but no falling-off-the-cliff scenario. A weakened pound appears to be an overwhelming boon to the domestic UK tourism sector and to tourist retail spending. But tourism alone is unlikely to account for the strength of retail growth, which suggests that Brits themselves are continuing to spend.