Fresh fears are emerging that the British economy is beginning to wilt under Brexit uncertainty after the fashion retailer Asos issued a shock profit warning, causing a plunge in retail shares in the City.
The internet shopping firm warned that UK sales growth would fall short of expectations, raising concerns that consumers are reining in spending against a backdrop of parliamentary deadlock and Bank of England warnings over the economic consequences of a hard Brexit.
Shares in Asos plummeted by almost 38% to £26.14 after it delivered the unexpected update on its sales performance for November, wiping more than £1bn from the value of the company on the stock market. The warning shot triggered falls in other retail shares amid mounting fears that the troubles facing the British high street, connected to Brexit and shifting consumer spending patterns, have started to spread online.
Major British retailers including Next and Marks & Spencer also posted declines, with shares in both companies falling 4.6%, as analysts warned that the squeeze on household finances since the EU referendum was taking its toll. Shares in Dunelm, the home furnishings retailer, fell nearly 11%, while online grocer Ocado shed 4.4%.
The Asos warning is the latest sign of stress for the UK economy as consumers and businesses struggle with Brexit uncertainty. Other signs of concern this week include:
- High street footfall is expected to fall by about 3% this week as shoppers curtail their spending
- Forecasts from surveyors that UK house prices will stagnate in 2019
- A prediction from a leading business group that business will barely grow next year, following a steep drop in 2018, as companies put spending plans on hold in light of the political impasse.
Retailers have started to offer steeper discounts than usual in the pivotal pre-Christmas shopping period, amid fears that waning levels of consumer confidence could affect their sales as Brexit draws nearer. A report by accounting firm Deloitte claimed that retailers had launched a record discounting spree in the run-up to Christmas, with price reductions averaging 44%. Deloitte, in an analysis of 800,000 products, said it expected the price cuts to reach 48% by Christmas Eve.
Asos said big price cuts across the market had forced it to bolster its promotions to win customers after a dire November that the Sports Direct founder, Mike Ashley, last week described as “the worst on record, unbelievably bad”. The Asos chief executive, Nick Beighton, said: “In fashion we are seeing an unprecedented level of discounting, certainly something I have not seen before, and that’s across the board.”
He said he had been “astonished at the level of promotions and discounting, especially around Black Friday”, and predicted that heavy discounting would continue in the coming months.
Asos knocked 20% off its products during the Black Friday sales event, as it had in previous years, but its rivals offered bigger price cuts, Beighton noted. However, he denied that Asos had lost market share in the UK, saying overall consumer spending was down. Trading in France and Germany, which accounts for the majority of the company’s EU sales, was also poorer than expected. Asos expects sales growth of 15% for the year to August 2019, instead of the 20-25% it had previously pencilled in.
Alongside the draining of consumer confidence amid the uncertainty over Brexit, the traditional British retail industry has come under mounting pressure from new online rivals, as consumers increasingly do their shopping online.
But analysts said that the warning sign from Asos – which operates solely online – showed that a deeper problem faced the industry. Mark Gregory, chief economist at the accountancy firm EY, said that sluggish pay rises for British workers in the last decade had damaged spending power and Brexit had only worsened the health of family finances.
“For consumers it’s been clear now that they have been running down their savings, increasing their debt, and wages haven’t been growing by much. It’s all coming home to roost,” he said.
British households spent around £900 more on average than they received in income last year, pushing themselves into deficit for the first time since the credit card boom of the 1980s. The average wage in Britain remains about £25 less than it was worth in the run-up to the financial crisis, following a period labelled by the chief economist at the Bank of England, Andy Haldane, as a “lost decade” for wage growth.
Family finances came under severe pressure after the immediate drop in the value of the pound following the EU referendum result, which pushed up the cost of importing goods to Britain. Inflation rose above the rate of wage growth, damaging the living standards of Britons, in a Brexit cost to households calculated by Mark Carney, the governor of the Bank of England, at more than £900 each.
The latest stress signals from the shopping trade paint a gloomy picture for the wider British economy, which depends on household consumption for about 60% of annual GDP.
Household spending increased by 1.9% last year compared with 2016, marking the slowest annual growth rate since 2012, while the accountancy firm KPMG reckons there will be a further slowdown this year and the picture will remain subdued in 2019 and 2020.
Fears over a disorderly Brexit have caused the British economy to almost flatline in recent months, with economists forecasting that GDP growth in the final three months of the year is likely to drop to 0.1% after a stronger summer, when the warmer weather and the World Cup encouraged consumers to spend more.
Business investment has also dropped for three consecutive quarters, in a first for the UK economy since the financial crisis a decade ago, which economists believe will act as a drag on future economic growth.
According to the British Chambers of Commerce, business investment is due to have contracted this year and will barely grow in 2019. Adam Marshall, director general of the lobby group, said: “Businesses are having to take action, delaying or pulling hiring and investment plans and, in some cases, moving operations elsewhere.”
The Royal Institution of Chartered Surveyors said on Tuesday that it expected the number of house sales to fall back by 5% to around 1.15m compared with 2018. Prices will come to a standstill nationally, said Rics, although in London and the south-east they are likely to “pull back” slightly.
Despite the economic malaise, there are potential positive signals for the future, as wage growth begins to accelerate at the fastest level in a decade, and inflation begins to fade; the latest figures are expected on Tuesday. Official figures for retail sales in November are also expected on Thursday.
Kian Tan, director of retail strategy at accounting group Pricewater house Coopers, said that Asos had still seen growth of almost 20% in UK sales in the three months to November, adding: “Yes, it was a profit warning, but it was in the context of high market expectations and previously high growth. Consumer spending is still rising. Wages are growing faster than inflation and there are other things that people are spending on.”
Richard Lim, chief executive of the consultancy Retail Economics, said that a cultural shift meant that many millennial-generation consumers had started to spend less on clothes and material goods and more on experiences, such as activities, holidays and eating out.
He said: “Certainly we’re going through a period of distress which is borne from unprecedented change in the industry. But from our point of view, of course there are many different moving parts [beyond Brexit].”