British Pound Falters after Retail Sales Slide

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- Retail sales slide -0.9% in December as Black Friday boost unwinds.

- Q4 sales also decline, suggesting weak finish to 2018 for economy.

- But the latest Brexit headlines could offer support to GBP next week.

The Pound appeared to falter on Friday after official data revealed a steeper-than-expected fall in retail spending during December, although losses have been shallow given the latest developments in the Brexit process, which could now support the currency into the new week. 

Retail sales fell by -0.9% during December, partially reversing a downwardly-revised 1.3% increase seen back in November, and below the consensus for a -0.8% decline. All types of store except those in the food and fuel categories saw turnover decline during the month.

"This is mostly due to the unwinding of the Black Friday boost but it could also be evidence that Brexit uncertainty is starting to weigh on consumer spending," says Thomas Pugh, an economist at Capital Economics.

Sales fell in both value and volume terms, according to the Office for National Statistics, for December and the fourth quarter as a whole. However, on an annual basis volume growth was less than the increase in the value of spending. 

Total spending on the high street was up 3.7% for the year to the end of December while volumes increased by 3%. However, when fuel sales are excluded those numbers come down to 3.1% and 2.6% respectively.

"It’s clear that retailers have had a tough start to the year. On a quarter-on-quarter basis, sales volumes fell by 0.2% in Q4. That drop is not unprecedented—volumes fell by 0.3% in Q1—and it follows two quarters of strong growth, but it nonetheless suggests that consumers have tightened their purse strings amid rising concerns about Brexit," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

Financial markets care about the data because of what it means for economic growth and the influence consumption can have on inflation. It's inflation that central banks are attempting to contain when they raise 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.

"This latest decline echoes the British Retail Consortium and the Visa Spending Index, both of which pointed towards a fairly torrid time for UK high streets over Christmas. We suspect the first few months of 2019 could be equally bumpy," says James Smith, an economist at ING Group. 

The Pound-to-Dollar rate was quoted -0.32% lower at 1.2942 following the data release on Friday while the Pound-to-Euro rate was -0.45% lower at 1.1345.

Sterling declined against all G10 currencies Friday but those losses could easily prove to be shallow if a Friday report from The Times turns out to be correct. The paper says Democratic Unionist Party (DUP) MPs would support the idea of a customs union with the EU if it applies to Northern Ireland in the same way it does Great Britain. 

There is a chance that DUP support for a customs union might encourage some pro-indenpendence Conservative Party MPs to moderate their positions, raising the propsect of a consensus being found on the government benches and in parliament. However, the DUP itself later came out to deny the broad thrust of The Times' article.

"“We want an agreement which returns control of our money, our laws and our borders through a UK wide FTA with the EU. The story in the Times is an attempt to cause division. Such tactics are not new to us and as in the past will not succeed,” says a statement from the Northern Irish party.

Members of parliament voted by 432-to-202 to reject the European Union Withdrawal Agreement Wednesday, marking the most significant loss of any UK government ever, which led the opposition to propose a ballot of confidence. 

MPs later voted by a majority of 19 to prevent the government from being toppled but this did little to bring an end to the Brexit saga any closer. There is now a significant group in parliament seeking desperately to stop the UK becoming independent from the EU however, there is no majority in favour of any singular legislative proposal.

Furthermore, the default legal position is that unless the Withdrawal Agreement is approved the UK will automatically exit the EU on March 29 and default to trading with it on World Trade Organization (WTO) terms. 

Most economists say that would be bad for the economy, while the post-referendum reaction shows it will almost certainly be bad for Sterling.

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