Signs of a slowdown?

UK retail sales suffered a surprise 1.9 per cent slump at the end of 2016, falling more than the 0.4 per cent forecast by economists, in news that hints at a moderation in Britain’s bumper post-Brexit spending.

Sterling was knocked by the data released at 09.30am, falling as much as 0.4 per cent against the dollar.

Here’s what UK-watching economists make of the numbers.

James Knightley at ING notes that despite the December fall, 2016 was still a good year for British retailers, with growth of 4.9 per cent in the year. Like many observers, he highlights the “havoc” wreaked in the statistics by the bumper discounting on Black Friday at the end of November which “contributed to big swings in the numbers”:

All in all though, the report indicates consumer spending performed fairly well in 4Q16 with next week’s GDP report expected to show the economy grew by 0.5% in the last three months of the year.

We suspect that retail sales growth will soften in 2017. Consumer confidence is weakening and employment growth has stalled while real household disposable incomes are being eroded by higher prices.

At the same time retailers themselves are going to see profit margins squeezed by higher import costs resulting from sterling’s weakness (this will continue due to currency hedges gradually falling off) and increases in the National Living Wage.

Paul Hollingsworth at Capital Economics highlights the volatility in the retail sales measures which point to some loss in festive cheer for the buoyant British shopper. A slowdown however should help allay fears, recently voiced by the Bank of England, of an unsustainable credit bubble arising in the UK:

The slowdown in spending growth should help to calm fears that low interest rates are driving an unsustainable credit-fuelled consumer boom.

And we expect spending growth to lose some more pace over the coming year as inflation picks up and squeezes growth in households real incomes. But with interest rates set to remain low and the cost of servicing debt very manageable, as well as strong confidence by past standards, we expect spending growth to slow, rather than grind to a halt.

Sam Tombs at Pantheon thinks the December figures are the first signs of the hit to consumer spending to come this year as inflation pinches spending in 2017:

The sharp decline in retail sales in December is the first sign that rising inflation and slowing job gains are forcing shoppers to curb their consumption.

Admittedly, unusually mild weather probably was the main driver of the 3.7% month-to-month drop in clothing sales. But sales fell across the board, with food, department store, household goods and non-store sales dropping by 0.6%, 1.2%, 7.3% and 5.3% month-to-month respectively.

The strength in retail sales in prior months therefore appears to have reflected consumers bringing forward purchases in order to avoid impending price rises.

Ian Geddes, head of retail at Deloitte, thinks 2017 will be a tough year for the country’s retailers on the back of higher inflation and a weaker pound hitting profits.

There are a number of known challenges facing the retail industry over the next 12 months, namely in the form of increasing cost pressures from inflation and sterling volatility.

However, there are also a number of opportunities, and those retailers that embrace digital technology, and focus on improving customer experience across all channels will be well-positioned to thrive in 2017.

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