UK Retail Sales Rebound Rescues Economy from Stall Speed in January

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- UK retail sales rise sharply in value and volume in January.

- Sales growth rescues economy from stall speed seen earlier.

- But 2019 growth is contingent on a "Brexit deal" say economists.

UK retail sales rebounded in January from a steep slump in the final month of 2018, as consumers headed back to the High Street in the New Year, potentially setting the economy up for a recovery of GDP growth from a similar downturn back in December. 

Retail sales grew by 1% in volume terms during January, more than reversing the -0.9% decline seen back in December, when economists had looked for growth of just 0.2%. This took the quarter-on-quarter growth rate up to 0.7%, from -0.2% previously. Annual growth was 4.2%.

"January 2019 has broadly returned to the same rate experienced in the summer with a growth rate of 4.2%; the highest since December 2016. This has coincided with a slowdown in the average store price (or often referred to as the “implied deflator”) to 0.4%," the Office for National Statistics says. 

The value of retail spending grew by 0.9% during January, reversing the -0.9% contraction seen back in December, taking the annualised growth rate up to 4.5%. The difference between value and volume is explained by a fall in food store prices during 2018. 

Some of the strongest increases in spending were seen in food, textile, clothing and footwear stores, while the Office for National Statistics says spending has returned to its summer boom levels early in the New Year. 

"January’s jump in retail sales shows that most households have maintained a happy-go-lucky mentality, despite the fraught political situation," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Right now, households’ real incomes are being supported by low inflation, a decade-high rate of nominal wage growth and solid employment gains. Low confidence will prompt consumers to hold back from buying cars, booking holidays and moving home, but the high street will be protected."

Tombs says household confidence in their financial situation is low because of the UK's pending departure from the European Union, which could be "might be costly eventually", but says uncertainty over the future won't be enough to keep consumers off the high street for now. 

Economists care about the retail data because of what it means for economic growth and the influence consumption can have on inflation. Rising spending is a boon for GDP and leads to inflation, which is what central banks are attempting to manipulate when they tinker with interest rates.

Retail sales are around one third of overall household spending, and the latter itself accounts for a significant portion of GDP, so the retail data often provides important insight into the pace of U.K. economic growth.

"In contrast to the Brexit pessimism, which seems to be weighing on other sectors, the rise in retail sales volumes in January implies that consumers are still willing to spend. Of course, unless a Brexit deal is signed soon, sales could weaken over the rest of Q1," says Thomas Pugh at Capital Economics. 

Friday's data follows a chaotic period for UK retail statistics, which have seen sharp swings in recent months owing to the presence of the Black Friday discounting period in November and ONS' "seasonal adjustment" process. 

December sales have fallen in recent years only to rebound in January as consumers have tended to do their Christmas shopping in November.

The steep fall in December's sales this year, which was followed by a sharp -0.4% fall for GDP in the final month of 2018, were thought to be the result of political concerns. 

The ongoing Brexit saga has weighed on business and household confidence, leading surveys to suggest the economy may have stalled at the start of the New Year. International trade tensions between the U.S. and China were also cited by some as weighing on growth. 

However, Friday's data contradicts the idea that the economy stalled in January, especially as the household sector accounts for so much of final demand GDP. The UK economy grew by 1.4% in 2018, down from 1.6%in 2017, although the European Commission forecasts GDP growth will fall to 1.3% in 2019. 

Pugh and the Capital Economics team, as well as Tombs at Pantheon, say there is a chance growth in the retail sector will weaken again in February or March as Brexit day nears and retailers cut back on discounting that is very typical throughout the "January sales" period often advertised in shops. 

"Stronger retail sales do suggest that consumers are more resilient to the Brexit uncertainty than we had feared and with inflation continuing to fall back – note that the retail sales deflator fell from 0.6% in December to just 0.4% – and pay growth on the up, there should be scope for consumer spending growth to gather some momentum further ahead," says Pugh. 

Both economists say there is scope for retail spending to grow further during the year head given declining inflation and rising wages, although they qualify these tips with  assumptions that there will be a "Brexit deal" agreed soon. GDP growth is also expected to benefit from a buoyant consumer too. 

"A 0.5% month-to-month pull back in overall sales in February, followed by flat sales in March, still would leave them up 0.7% quarter-on-quarter in Q1," says Pantheon's Tombs. "Consumers, therefore, look set to ensure that GDP continues to rise at a modest rate in Q1, despite the intensifying downturn in business investment." 

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