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Slamming on the brakes?
Retails sales in the UK economy performed worse than expected at the start of the year raising fears that Britain’s remarkable consumer spending since the Brexit vote could be falling foul of rising inflation.
On a month on month measure, sales excluding fuel were down 0.2 per cent and revised to steeper 2.1 per cent fall in December from 1.9 per cent. That meant January’s performance compared to the same month in 2016 was up by 2.6 per cent – its weakest pace since 2011.
Sterling fell as much as 0.7 per cent against the dollar on the day, reflecting investor concerns that a slowing economy could see the Bank of England refrain from a rate hike in the coming months.
Here’s what analysts are making of the numbers.
Ruth Gregory at Capital Economics notes the “abrupt end” to consumer resilience, attributing much of the slowdown to the hit imposed by higher prices. But she warns of over-estimating the effects on overall consumer spending in the UK economy:
There are still a number of reasons to think that spending growth will slow ahead, rather than grind to a halt.
For a start, survey evidence suggests that spending off the high street, such as in pubs & restaurants, has remained strong. Moreover, interest rates look set to remain low for some time to come, the cost of servicing debt should remain manageable and confidence remains strong by past standards.
As such, our forecast is for real consumer spending growth of around 1.8% in 2017, down from 2.8% last year.
James Smith at ING says slowing consumer spending coupled with weak wage growth will be the main reason the Bank of England will hold steady on any rate hikes this year “despite recent commentary suggesting they have limited tolerance of higher inflation”.
Wage growth is starting to moderate and the employment outlook is, at best, looking subdued.
When you put all this together, real incomes look set to start falling and it could be an increasingly tough 2017 for the UK consumer. Recent consumer confidence data has shown that sentiment has been dipping, having rebounded from the immediate post-Brexit decline.
Howard Archer at IHS Global thinks a “the long anticipated slowdown in the economy may be about to materialise”.
The major problem facing the economy – and retailers in particular – is that it looks inevitable that consumer purchasing power will be squeezed ever harder as 2017 progresses.
We also suspect that the labour market will soften over the coming months as the economy slows and business concerns and uncertainties over the outlook deepen. It looks more likely than not that inflation will move above earnings growth in 2017.
We suspect inflation will reach 3% before the end of 2017 and will peak around 3.3% in the early months of 2018.
Sam Tombs at Pantheon notes that the robust spending around the autumn could have reflected consumers pushing forward their purchases in anticipation of higher inflation.
Chart via Bloomberg