Photographer: Chris Ratcliffe/Bloomberg

U.K. Shoppers Brace for New Brexit Test as Inflation Picks Up

  • Holiday sales updates will show latest reaction to referendum
  • Rising inflation, diminishing confidence may hamper spending

British consumers, who helped the economy emerge largely unscathed from the Brexit vote, now face their next big health check.

A week after Next Plc offered a grim outlook for 2017 following a downbeat holiday selling season, Marks & Spencer Group Plc, department-store chain Debenhams Plc, grocer J Sainsbury Plc and other retailers are set to provide business updates. Their insights will be scoured for clues on household spending and whether the economy will continue weathering the U.K.’s decision to leave the European Union.

Consumer confidence has held up surprisingly well since the June EU vote, and borrowing is surging. Visa said Monday that spending growth in the fourth quarter was the strongest in two years. But the coming months pose a challenge for consumers -- even those as seemingly unflappable as Britain’s. An expected sharp upswing in inflation and uncertainty over the economic outlook could threaten households’ capacity to splurge.

“We’ve seen pretty strong rates of both retail sales and overall spending growth,” said Paul Hollingsworth, an economist at Capital Economics in London. “But that drop in the pound that occurred after the referendum, that’s going to start to feed through more into inflation over the course of this year, and households are going to start to feel the impact.”

While the government hasn’t clearly elaborated its plan for leaving the bloc, signs are gathering that it’s headed for a so-called hard Brexit, in which the U.K. would lose access to Europe’s single market. Prime Minister Theresa May said Sunday that regaining control of immigration and lawmaking are her priorities in the process, sending the pound to a 10-week low.

Aftershocks

If Brexit’s aftershocks spread to the U.K.’s 487 billion-pound ($592 billion) retail industry, they’ll add to upheaval caused by changes in consumer behavior, with people buying more online

Many are also prioritizing spending on experiences such as vacations or eating out over, say, a new pair of shoes, though even businesses in those sectors are experiencing some fallout. Celebrity chef Jamie Oliver plans to close six of his Italian restaurants around Britain after the pound’s Brexit-induced weakness pushed up costs.

A busy week of Christmas trading updates from U.K. retailers picks up on Tuesday with Wm Morrison Supermarkets Plc, followed by Sainsbury a day later. Debenhams, Marks & Spencer, online retailer ASOS Plc and supermarket operator Tesco Plc are all set to report on a blockbuster Thursday.

In November, Marks & Spencer said the impact of Brexit “remains uncertain,” citing currency volatility, confidence and the potential for new trade tariffs. While the FTSE 350 Index gained 13 percent in 2016, the Retail Supersector Index fell for a third year.

Consumer spending supported the economy in 2016, but there could be payback. According to the Bank of England, some households brought forward purchases of bigger-ticket items like furniture and electrical goods in anticipation of stronger price increases, meaning they could be planning to spend less this year.

A plunge in the pound since the Brexit vote threatens to squeeze retailers’ profit margins by making imports more expensive. So far they’ve found it hard to pass along higher costs to consumers. But pressure will grow, and inflation is forecast to hit close to 3 percent by the end of the year. That’s one reason the BOE sees economic expansion slowing to 1.4 percent from 2.2 percent.

Wage Support

Demand this year could be supported by further wage growth, which would compensate for faster inflation, or a continued appetite for credit. Morgan Stanley said in a report last week that it expects a gradual consumer slowdown where inflationary pressures are substantial, while noting that it’s “eating humble pie” after getting its 2016 forecasts wrong. 

The bank’s view is that sustained resilience would take a “Goldilocks Brexit,” though developments so far suggest that outcome may be a long shot.

“The consumer will also be key to prospects in 2017,” said Andrew Goodwin, an economist at Oxford Economics. “The extent to which the weaker pound translates into higher inflation, and the way in which consumers respond, will have a large bearing on whether the economy can sustain the momentum seen at the end of 2016.”

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