One of the most fundamental pillars of the UK economy disappointed in June, with sterling reacting sharply to the downside following the news on weak retail sales.
The retail sector and overall domestic consumption has been considered one of the most fundamental pillars of the UK economy. It is therefore no wonder that sterling plunged markedly after the news broke out on Thursday morning showing that UK shoppers failed to cheer markets, as retail sales volumes unexpectedly declined 0.4% on a month-on-month basis.
Thursday's release also showed total retail sales slowed in the second quarter as a whole, when compared with the previous quarter and, according to official data, contributed zero percent to the second-quarter gross domestic product (GDP) growth.
Sterling consequently dropped against nearly all of its major peers following the retail figures. The pound corrected slightly in the afternoon against the US dollar, following the immediate post-release plunge, and was trading later Thursday afternoon at 0.11% below the previous day's close.
Economic analysts and forecasters have been stressing the need for strong domestic spending to sustain growth in the UK, especially given the fact that inflation in the country remains significantly low, while manufacturing and exports continue to disappoint.
So the news of retail failing to continue rising at the end of the second quarter probably increased concerns about the sustainability of shoppers' spending appetite and its subsequent boost to the overall growth.
In its latest survey, the Confederation of British Industries (CBI) said sales volumes slowed over the year to June, but growth outlook in the sector remained buoyant. CBI chairman Barry Williams said, "Even though growth slowed slightly this month [June], retailers are not letting that subdue their hopes for the season."
"Low inflation, expected to stay below 1% throughout this year, has given customers more discretionary income. The power of the pound in their pocket is going further and shoppers are spending more on treats," he added.
Expectations for domestic spending in Britain have been mixed recently, with some forecasters warning it could deteriorate even further once the Bank of England begins to raise its base rate from the record low of 0.5%, given the burden of household debt and rising house prices.
Much will now depend on incoming data in the upcoming months to see if the June dip in sales was only a one-off event, or an indication of an underlying trend sifting into UK households' budgets.
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