The UK economy is showing growing signs of strain from the soaring cost of living amid a sharp drop in retail sales and the biggest loss of momentum in service sector activity since Omicron announced hit businesses late last year.
Figures showed a bigger-than-expected drop in retail sales in March was followed by a slowdown across the economy in April, with record inflationary pressures hitting businesses.
The Office for National Statistics (ONS) said retail sales volumes in Britain fell 1.4% in March, after falling 0.5% a month earlier, as shoppers adapted to rising costs. City economists had forecast a 0.3% decline.
The drop in demand came before buyers felt the impact of the rising cost of living in April, when the cap on household energy bills rose by 54% and national insurance contributions increased by 1.25 percentage points.
Darren Morgan, director of economic statistics at the ONS, said: “Retail sales fell notably in March as the rising cost of living hit consumer spending. Online sales were particularly hard hit due to lower discretionary spending. »
Separate figures from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed UK private sector growth recorded the slowest rate in three months as high inflation and the war in Ukraine hit demand.
The monthly snapshot, which is closely watched by the Treasury and the Bank of England for early signs of the economy, revealed that service providers saw a considerable loss of momentum in April as they passed on rising costs on consumers in a context of rising commodity prices.
Warning that escalating costs were offsetting an increase in spending since the end of Covid restrictions, the survey found that escalating energy, fuel and raw material costs have contributed to widespread price increases means charged by companies.
Chris Williamson, chief economist at S&P Global, said: “High prices and the associated rising cost of living have often been cited as the main cause of falling demand, with Covid also continuing to affect many businesses. . Brexit and transport delays were considered to have further hampered export sales, while the war in Ukraine and Russian sanctions also resulted in a loss of overseas trade.
Following the release of the figures, the pound fell 1.3% to its weakest level since late 2020, just below $1.29.
According to ONS data, spending on food fell for the fifth consecutive month, with supermarkets reporting a sharp fall in sales alongside a drop in butchers and bakers, as well as an 11.3% fall in spending in liquor and tobacco stores.
The ONS said part of the drop in spending could be explained by consumers returning to pubs and restaurants after the easing of pandemic-related restrictions, although it warned that the impact of rising food prices on the cost of living was also hurting retail sales.
Fears of a sharp slowdown in consumer spending have intensified in recent weeks, with surveys showing the public has become gloomier about the economy than when banks were on the brink of collapse during the financial crisis from 2008. ONS figures show that 87% of adults reported an increase in the cost of living at the end of March, up from 62% in November.
Amid soaring global energy prices and the rising cost of a weekly store, inflation hit 7% in March – the highest level since 1992 – and is expected to rise further this month after a record increase in gas and electricity prices for households. The Bank of England has warned that the cost of living measure could hit 10% later this year, the highest level since the early 1980s.
As petrol and diesel prices hit a record high last month as the Russian-Ukrainian war reverberates through global oil and gas markets, fuel sales in Britain fell by 3 .8% in March, as households reduced non-essential travel.
The ONS said online spending fell to 26% as a proportion of total sales – the lowest since February 2020, just before the spread of the Covid-19 pandemic – with consumers returning to shop on the high street and as families cut back on non-essential items.
Online sales soared during the lockdown, peaking at 37.1% in February 2021. Although expected to decline as the economy reopens, spending remains much higher than before the pandemic, when online retail accounted for about a fifth of overall sales.