Strategy & economics
Chart of the month - May
UK consumers tighten pockets amid inflation squeeze
UK official retail sales disappointed markedly in March, confirming a slowdown in consumption growth as higher inflation depressed household’s spending power. Core retail sales (excluding auto fuel) contracted by 1.5% on a monthly basis and 1.4% on a three month basis. This made the first three months of the year the worst quarter since the start of 2010. Weaker sales volumes were broad-based and coincided with a rising trend in average store prices. Since the end of 2016, price deflators for both non-food and food sales have turned sharply higher, ending more than two years of decline. Consequently, annual retail sales volume growth rates for both non-food and food items have more than halved over the first quarter of 2017.
The British Retail Consortium (BRC) report, another gauge of UK consumer spending, showed the first annual drop in non-food sales since 2011, although food sales continued to show growth. This provided further evidence that rising food prices may be crowding out non-food discretionary spending. Indeed, the March inflation report indicated that the inflation rate for energy items has now peaked whereas that for food is still gaining momentum. In fact, the largest upward effect on prices in March was attributable to a wide range of food products, consequent of soaring imported food prices (rising at double-digit rates) due to the slump in sterling.
A spike in inflation and slower pay growth meant that regular real wage growth dipped to -0.1% YoY in March, and will likely weaken further over the course of 2017. UK consumers had previously benefited from improving real wage growth since the middle of 2014 due to lower energy prices, but they are likely to feel the squeeze going forward. The previous strength in consumer spending has also been accompanied by a decline in the savings ratio, which is unlikely to fall much further. Slower real wage growth, less scope to deploy savings and a weak first quarter all point to a slowdown in UK household consumption growth in 2017. On a more positive note, there is little sign of a significant deterioration in UK consumer confidence, which suggests consumption is unlikely to fall precipitously.
Overall, we expect the UK’s growth mix to be more balanced in 2017, with more positive contributions coming from net trade and capital investment, offsetting the slowdown in household consumption. This suggests that, despite the widely-acknowledged downside risk to consumption, GPD growth in 2017 will be at a similar pace to that seen in 2016.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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