UK Retail Sales Data Confirms the Mighty British Consumer is Coming Under Pressure
Pound Sterling came under pressure on the morning of Friday, February 17 after it was announced by the ONS that UK retail sales for January 2017 fell.
The headline monthly retail sales figure for January read at -0.3%; analysts had forecast a reading of 0.9%.
Furthermore, there was a notable revision to the December release which was cut down to -2.1% from a previous 1.9%.
The quantity bought in the retail industry is estimated to have increased by 1.5% compared with January 2016, the lowest growth since November 2013.
The data confirms that the all-important UK consumer - the engine of UK economic growth - is tightening the purse strings.
"In the three months to January, retail sales saw the first signs of a fall in the underlying trend since December 2013. We have seen falls in month-on-month seasonally adjusted retail sales, both in conventional stores and online, and the evidence suggests that increased prices in fuel and food are significant factors in this slowdown,” says Kate Davies, ONS Senior Statistician.
Today’s outturn is consistent with the message from various private sector surveys such as those of thee BRC and the CBI, along with John Lewis sales that retail spending in the first few weeks of 2017 has been lacklustre.
"Today’s data alongside the report of slower wage growth released earlier this week will only reinforce the concerns of the majority on the Bank of England’s rate setting committee that there are downside risks to economic growth, as well as upside risks to inflation that need careful monitoring," say Lloyds Bank Commercial Banking in response to the release.
With rising inflation set to further eat into real wages this year there are good reasons to expect a further slowing in consumer spending.
As we can see below, it would appear that a pick up in prices is coinciding with the slowdown in spending:
"A bleak few months are predicted for the retail sector. The combination of soaring inflation and slow wage growth is likely to see spending power quashed and high streets abandoned," says Paul Sirani, Chief Market Analyst at Xtrade. "Retail was the beating heart of the UK economy in 2016, so with consumer spending expected to slide in the coming months we could see the Pound push lower against both the Euro and the Dollar."
With regards to the Pound, investor focus is moving away from pure-Brexit themes to a more traditional focus on interest rates and interest rate expectations.
And when it comes to interest rate expectations, inflation is key.
There are two types of inflation to be aware of - that 'organic' inflation generated by economic growth and inflation generated by fuel prices and the one-off impact of the fall in the value of Sterling.
The Bank of England would only consider a pro-GBP interest rate rise should inflation generated by economic growth rise agressively. So while inflation is rising it is not the 'right kind of inflation' as it is being generated by rising oil prices and the effect of Sterling declines.
The retail sales data suggest demand in the economy is waning just as we head into Brexit negotiations and suggest the path of the 'organic' type of inflation remains tepid.
"Much of the effect of the weaker pound on import prices is yet to come through into inflation," says Victoria Clarke at Investec. "For the UK economy, the extent of the squeeze households face as inflation rises, and how they react to this, such as through reductions in spending or saving or both, is a key uncertainty for the year ahead."
Interest Rates Matter for the Pound
UK interest yields remain low by global standards as investors see little chance of a Bank of England interest rate in 2017, or in the early part of 2018.
Today's data has reinforced this theory.
The Bank is expected to keep settings stable until such a time as the economy starts generating inflationary pressures. Yes, inflation is growing but it is largely because of the rise in costs of fuel and the one-off effect of the fall in the Pound.
That is why wage data and retail sales are important, it gives a better snapshot of inflation driven by economic activity which is what the Bank is primarily interested in.
Global interest rates have become an important cue for foreign exchange investors in 2017 as they seek out high-yielding money markets.
We mentioned yesterday that the South African Rand was surging because of such dynamics - investors are borrowing in cheap Pounds, Euros, Dollars and Yen to invest in South African money markets where the South African Reserve Bank’s base rate is 7.0%.
Interest rates and interest rate expectations matter again, and for the Pound this is not a supportive scenario.