12 August 2026: Retail Sales Growth Slows to 5-Month Low

Britain's summer of modest economic optimism is colliding with silent building sites, as the construction sector, once again, fails to ‘pull its weight’.

Economists polled in a Bloomberg-tracked survey expect UK GDP to have contracted by 0.1% in June, partly unwinding May's 0.1% gain, with official figures due from the Office for National Statistics tomorrow. Analysts see a sharp fall in construction activity pulling growth back, while services and production output stagnate, with construction output possibly dropping by as much as 0.7% in June alone.

The sector has been shedding jobs for months. UK construction output fell 1.8% year-on-year in May, marking the seventh consecutive monthly decline, even though the ONS three-month measure grew 1.6% in the three months to May, a contradiction that illustrates how volatile the underlying series has become.

Deutsche Bank economists said clothes retailers, pubs and art galleries likely received a boost from warm June weather, preventing a sharper fall, while higher hospitality spending tied to the 2026 World Cup could yet surprise forecasters, although anecdotal evidence points to there having been a majority of ‘armchair supporters’

Accommodation and food within services are nonetheless expected to weigh, leaving tomorrow's release poised between two stories: a technical dip that partly reverses May's possibly erratic rise, or confirmation that the fledgling recovery has stalled at the halfway mark of 2026.

The Construction Products Association forecasts that infrastructure output will rise by 4.4% in 2026, driven by major projects. Still, private housebuilding and commercial work remain depressed after years of high interest rates, so the public pipeline is carrying the sector almost alone.

UK retail sales rose 1% YoY on a like-for-like basis in July, falling short of market expectations for a 1.5% gain and slowing from June's 1.7% increase.

The latest figure also marked the softest growth since February, as consumers remained wary of big outlays despite support for England's run to the World Cup semi-finals and a series of heatwaves.

Food sales rose 3.8%, while non-food declined 0.7%.

Clothing sales benefited from hot weather, although footwear sales fell as consumers broke out last year’s sandals and flip-flops.

Barclays' broader measure of consumer spending rose 2%, slightly faster than June's 1.9% increase, with essential spending up 2.9% and non-essential spending up 1.6%.

Pub transactions jumped 10% during the month, supported by World Cup matches, while travel spending shifted towards domestic staycations as airline spending fell 6%.

The two significant datasets paint a picture of an economy that is struggling to perform as the Government would hope. While Andy Burnham continues to make ‘pledges’, he is not receiving support from several areas that have traditionally backed the Government. It feels like the entire country is running on empty, awaiting a miracle innovation from Burnham, who is seen as the last hope for a hopelessly divided country.

Burnham now faces pressure over North Sea oil and gas as a decision on allowing new drilling moves closer.

As Britain endures another heatwave, thankfully set to be shorter than the previous four this summer, environmental groups have urged the Prime Minister to refuse permission for oil and gas production in two North Sea areas, Jackdaw and Rosebank, as part of the fight against climate change.

But opposition politicians, the oil and gas industry and US President Trump have called for him to grant permission, arguing this would protect jobs and cut household bills.

The Labour party is also split on the issue, while watering down environmental commitments could limit Labour’s ability to tempt back voters who have switched to the Greens since 2024.

Sterling traded firm but mixed yesterday, holding near recent highs as momentum slowed ahead of key US CPI and UK GDP releases. Across major pairs, GBP was among the stronger G10 currencies, though gains were uneven, with oil-driven USD strength and softer UK retail data limiting upside.

There is a nervous feeling you get when you are about to receive your mark on a paper you turned in two weeks ago. FOMC Chairman Kevin Warsh may be feeling a bit of that ahead of the US CPI report.

While he talked a tough game about price pressures, vowing to deliver 2% inflation, three of his FOMC colleagues dissented from the majority, arguing that an immediate interest rate hike was needed to fend off inflation.

Today’s CPI report will be the first indication of which side of the FOMC is more in tune with the current economy. The new Fed Chairman needs more than the seemingly vacuous promises that are becoming the norm to bring the inflation rate down to its 2% target. Warsh wants to run a covert operation to drive inflation down, while the market wants him to be overt, as his predecessors and the majority of the FOMC have been.

Fed Funds Futures markets are currently pricing in almost exactly a 50% chance that the Central Bank will raise interest rates at its meeting next month, following last week’s weaker-than-anticipated NFP report.

U.S. inflation is expected to post a modest rebound after recent dips, driven by the normalisation of volatile sectors such as motor vehicle insurance and shifting energy costs, even as broader economic pressures and upcoming Federal Reserve decisions remain in focus.

Economists forecast that the July Consumer Price Index Report will show a rebound in inflation after a surprising decline in June. Fuel prices at the pump fell on balance in June, which should help limit the overall rise in inflation. However, forecasters predict that the July report will show upward price pressure continuing at a faster pace than Federal Reserve officials would like.

For July, economists expect CPI to increase by 0.1% after dropping 0.4% in June, according to FactSet consensus estimates. On an annual basis, economists forecast inflation will increase by 3.4%, down slightly from 3.5% in June. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% for the month and 2.5% from year-ago levels.

Treasury Secretary Scott Bessent declared the K-shaped economy “over” in a CNBC interview this week, arguing that lower-income Americans are finally closing the gap with wealthier households. However, economists and wage data tell a more complicated story.

Bessent said he was “sick of hearing about this K-shaped economy” and pointed to recent wage data to support his claim. The bottom 25% of earners, those in the lower income bracket, saw weekly earnings rise 5.5% YoY in the second quarter of 2026, compared with just 1.5% for the other 75%, according to Bureau of Labour Statistics figures he cited.

Chicago Fed President Austan Goolsbee says the Federal Reserve's biggest economic problem isn't a weakening labour market. It's still inflation, which has remained above the central bank's 2% target for more than five years, even as recent employment data have given policymakers another reason to be cautious about raising rates.

Goolsbee described the labour market as "stable, without being spectacular", echoing Richmond Fed President Tom Barkin's recent remarks, and said inflation remains the problem doing the most damage to ordinary Americans. His comments came in a recorded Q&A released this week. The Fed has held rates at 3.50%-3.75% for the entire year so far.

The US dollar was steady to slightly firmer yesterday, consolidating ahead of today’s July CPI release. Across major FX pairs, the dollar held its ground, recovering modestly from last week’s payroll‑driven losses as rising oil prices and geopolitical tensions supported demand for the USD.

Public perception suggests that the German economy remains marked by the crises of recent years.

The energy crisis, the inflationary shock and the prolonged weakness of the industrial sector have weighed heavily on confidence.

However, the latest data paint a more encouraging picture.

The German economy grew in the first half of 2026, demonstrating remarkable resilience amid both the conflict with Iran and the sharp rise in energy prices. At the same time, leading indicators point to further improvement in economic activity. Business surveys have improved, industrial orders are recovering, and financial markets show little sign of a crisis.

Anyone following the public debate on the German economy could easily conclude that the country remains mired in persistent weakness. Discussions continue to focus on structural weaknesses, deindustrialisation, excessive bureaucracy and a supposed loss of competitiveness.

Many of these challenges are, without doubt, real. However, they have constructed a narrative that is no longer fully aligned with the most recent economic data. It is also worth noting that last month the Federal Government presented a comprehensive reform package designed to address many of these concerns.

A particularly telling example occurred during the conflict with Iran earlier this year. When oil prices soared, memories of the energy crisis quickly resurfaced in financial markets. Concerns about a combination of lower growth and higher inflation, the classic stagflation scenario, intensified alarmingly.

Bond markets initially reflected these fears through higher inflation expectations and lower real yields. To many investors, it seemed that the European economy, and Germany in particular, would struggle to absorb another external shock of that magnitude.

However, the German economy demonstrated remarkable resilience. There was neither a sharp slowdown nor a lasting deterioration in the economic outlook. German GDP grew by 0.2% QoQ in the second quarter of 2026, having risen by 0.4% in the first quarter. Overall, the first half of the year saw cumulative growth of 0.6 per cent, equivalent to approximately 1.2 per cent on an annualised basis.

Germany will be an interesting case study over the second half of 2026 as it begins to show signs of its old resilience in the face of an entirely new set of drivers.

Meanwhile, in the first half of the year, the French state's interest payments to its creditors rose by 19%, reaching €34.5 billion. France now appears to have entered a prolonged cycle of sluggish growth and increasingly expensive debt, raising fears of a runaway spiral.

The debt crisis some had feared has not materialised yet. Last Thursday, Agence France Trésor, which manages France's public debt on behalf of the state, was tasked with borrowing between €10.5 billion and €12.5 billion in the long-term market. During the month's main bond auction, investors and banks turned up in force, offering to lend 2.7 times the target amount. As a result, the agency was able to raise the maximum planned sum.

But it came at a cost. To sell its 10-year bonds, France had to offer an annual interest rate of 3.9%, one of the highest levels in 15 years. In 2020, the Treasury managed to issue bonds at negative rates, meaning investors effectively paid the state to borrow. But that was another era.

No accidents, no recent mishaps. But with each new issue, borrowing rates keep climbing. And a question keeps growing: Could France's debt spiral out of control because of a "snowball effect," triggered by interest rates rising faster than economic growth?

In the second half of 2026, French Government debt will be a major talking point in the markets, overshadowing the Presidential election, which takes place next Spring. That is, of course, unless ECB president Christine Lagarde ‘throws her hat in the ring.’

The euro was flat to slightly weaker yesterday, trading in a tight range as markets waited for today’s U.S. CPI release. Across FX markets, EUR showed minimal movement, slipping modestly against the dollar and holding steady against most majors.

Have a great day!