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Office of National Statistics data showed that sales grew at an annual pace of 6.3%. Great news for retailers, you might think.
Sadly not. The booming sales were accompanied by plunging prices – with the average price of goods sold down 1.5% on last year.
So far shops are happy to sacrifice profit margins in exchange for drawing more customers in the door – but for how long?
The UK high street remains as brutally competitive as ever, with shops being forced to slash prices last month in order to keep customers spending.
But with consumers under pressure from rising mortgage rates and generally more expensive credit, life can only get harder. It’s not just pressures on demand that shops need to worry about – there’s pressure on the other side too. The cost of energy and raw materials just keeps rising – the cost of manufacturing goods, of shipping them into branches, of heating and lighting stores – all of this can only go up as the price of oil heads ever closer to $100 a barrel.
That’s bad news for profit margins – which is why I would avoid buying into the UK retail sector, even though shares have underperformed the rest of the market this year.
The strength of the pound helps to alleviate some of these problems, but that’s not something that can be relied upon to last forever either. Of all the major currencies, sterling is the one which arguably has the most in common with the dollar. We have ever-growing public debt (which came in much higher than expected once again yesterday – Alistair Darling must wake up every morning thanking his lucky stars that he’s Chancellor), for one thing.
And then there’s our wobbly-looking housing market. Consumption might not be suffering, but the property market is showing definite signs of a slowdown – the Council of Mortgage Lenders reported that lending in August fell by 12% across the month, much more than is normal even for the quiet summer months.
It’s unsurprising. The number of people rejected for mortgages has leapt by around 60% over the past six months, while the number of mortgages actually available has dived, with sub-prime products vanishing from the shelves faster than you can say “credit crunch”.
We can’t rely on the Bank of England to cut interest rates to bail everyone out. Inflation might have been static last month (at 1.8%, comfortably below the 2% target level). But as we’ve seen above, much of this was down to shops cutting prices to drive sales – the cost of food and fuel is still going up.
As Vicky Redwood of Capital Economics said, “with inflationary pressures still strong and retail sales figures supporting evidence that the economy grew more strongly in the third quarter than the Monetary Policy Committee expected, interest rates look likely to stay on hold until next year.”
Of course, that won’t stop people complaining that the Bank should be doing more. It’s always nice to have someone to blame for all your troubles when your reckless over-borrowing finally catches up with you – and few have done this as brazenly as Northern Rock chief executive Adam Applegarth.
In front of the Treasury Select Committee the other day, Mr Applegarth bleated – among other things – that the Bank had blocked a rescue deal by Lloyds TSB (he didn‘t mention the name, but everyone knew who he was talking about), which would have bailed the Rock out and prevented a run on the now-stricken bank.
Clearly feeling somewhat persecuted itself, however, the Bank didn’t take this lying down. The Telegraph reported yesterday that the BoE had felt a little bit “misrepresented” by Applegarth’s accusation. It turns out that Lloyds had asked for a £30bn loan over one to two years – without a penalty rate of interest, to boot – to help fund any bid. Bear in mind, this is before the run on the bank happened, so as The Telegraph says, it just shows “the severity of the crisis facing the lender.”
Unsurprisingly, the Bank felt such a loan would be “inappropriate.” The very fact that Lloyds felt it could float such an idea in the first place – perhaps hoping that the authorities would be desperate enough to avoid embarrassment to accept the deal – is just an unpleasant reminder for shareholders that this is a bankrupt bank. It’s already borrowed £16bn from the BoE, and most people expect it’ll need at least another £5bn. Without the government life support, it would be worth nothing – and I suspect that most of the potential bidders are only too aware of that fact.
Just before I go – here are details of a conference that could well be of interest to readers of Money Morning. It’s never easy to decide where you should be investing your money, and with markets particularly jittery at the moment, the consequences if you get it wrong are increasingly severe. So it’s always good to get an expert opinion – and you can hear more than 50 of them lining up to give you their share tips and profitable strategies at the World Money Show.
The London leg of the conference is being held on 30 November – 1 December at The Queen Elizabeth II Conference Centre and will feature 14 panel presentations and leading investment product and service providers. Call today to register for The World Money Show London at 00 800 1414 8888 (international free phone) between 10.30 am -10.30 pm (EXCEPT from 28 October to 4 November when hours will be 9.30 am to 9.30 pm because of the daylight saving time difference). Don’t forget to mention priority code #009184. Or visit: https://www.worldmoneyshowlondon.co.uk/ukms07/main.asp?scode=009184
Turning to the wider markets…
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In London, the FTSE 100 gave up an intra-day high of 6,722 to end the day 68 points lower, at 6,609. Housebuilders such as Taylor Wimpey and Barratt Developments led the fallers as the retail sales figures dampened down expectations of an interest rate cut. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 closed down 51 points, at 5,767. And the Frankfurt DAX-30 was off 64 points, at 7,921.
On Wall Street, an earnings report from Bank of America showing a decline in Q3 profit weighed on the blue chips. The Dow Jones was 3 points lower, at 13,889. The S&P 500 was off 1 point to end the day at 1,540. However, it was a better day for the tech-rich Nasdaq which added 6 points to close at 2,799.
The Bank of America figures hurt Japanese financials too, dragging the benchmark Nikkei 225 down 291 points to its lowest close in three weeks – 16,814. In Hong Kong, the Hang Seng was up 166 points to 29,465 at time of writing.
Crude oil was hovering below the $90 mark today at $89.44. And in London, Brent spot had fallen to $85.24.
Spot gold hit its highest level since January 1980 this morning – $769.80 – before falling back to $768.80. And silver rose to $13.80.
In the forex markets, the pound was at 2.0422 against the dollar and 1.4302 against the euro this morning. And the dollar was at 0.7001 against the euro and 115.23 against the Japanese yen.
And in London this morning, advertising group WPP announced a 4.9% rise in Q3 revenue to £1.48bn. However, the results – which are at the low end of analysts’ forecasts – did not impress investors and WPP shares opened 4% lower. However, CEO Martin Sorrell said the advertising industry had so far not been affected the liquidity crisis and that he expected the industry to continue to grow by 5-6% next year.
And our recommended articles for today…
Tax vs. happiness: the real reason people marry
– It’s nice that politicians have come round to the idea that being married is a good thing, says Merryn Somerset Webb. But there’s no need for them to actually do anything about it via the tax system. Click here to read more: Tax vs. happiness: the real reason people marry
Why oil isn’t so expensive after all
– Oil may be at historic nominal highs, but it’s actually fairly cheap,says Garry White. In fact, a pint of raw crude would cost less than a pint of milk, beer or mineral water. And that means there’s plenty of upside left in the oil price. For more on why it’s not just geopolitical instability that’s going to push the oil price up much higher, click here: Why oil isn’t so expensive after all