UK Retail Sales Disappoint but Stronger Growth Expected in Coming Months

Modified: Friday, 16 February 2018 15:16 GMT
Written by: James Skinner

Friday’s retail sales data shows UK consumer spending remained tepid at the start of the year but stronger growth is on the horizon as inflation recedes.

The Pound slipped against many of its G10 rivals during morning trading Friday after the latest retail sales data came in below analyst expectations.

Office for National Statistics data showed retail spending rising by just 0.1% during January which, although marking an improvement from December’s contraction, was below the consensus expectation of economists for sales growth of 0.5%.

This was the slowest pace of growth seen since April 2017, the time when consumer spending reached its nadir after a steep slowdown in the first quarter, while the year-on-year growth rate for food retailers saw its sixth consecutive month of decline thanks to a continued rise of food prices.

“January’s subdued rise in the official measure of retail sales volumes suggests that the real pay squeeze is continuing to take its toll on high-street spending,” says Ruth Gregory, a UK economist at Capital Economics.

All categories of retailers saw a slowdown in the pace of sales growth in January, with the exception of non-food store. Retailers of sports equipment, games and toys provided the main contribution to January’s meagre growth.

Feedback from retailers to the ONS suggested that New Year’s resolutions to “get fit and lose weight” contributed to this increase of sales when compared with the previous year.

But, "sales would need to rise by around 1% over the next two months in order for it to provide the same support to GDP growth that it did in Q4,” warns Gregory.

Friday's data comes after December’s retail sales posted a steep fall, while surveys of conditions across the manufacturing, construction and services industries in January all also pointed toward a cooling of growth at the start of the year.

This was after ONS figures showed UK economic growth picking up the pace in the fourth quarter of 2017, rising 10 basis points to 0.5% for the period and making for overall GDP growth of 1.8% in 2017.

Spending to Increase

Like most countries, the UK is heavily reliant on the consumer but December’s data showed the annual pace of spending growth slipping to its lowest level since 2013.

January retail sales come as consumer price inflation sits at 3%, thanks to a double digit devaluation of the Pound, while wage growth languishes at 2.4% on an annualised basis, meaning real incomes are falling for UK households.

This has been a source of mounting pressure on consumer spending ever since the Brexit referendum of 2016, given the weaker purchasing power of consumers and that Office for National Statistics figures only measure the inflation adjusted value of goods sold on British high streets.

However, there are signs this might change over the coming months, with nominal retail spending having held up well and inflation expected to fall back during the quarters ahead.

"The ongoing strength in annual nominal retail spending growth, which stood at 4.5% in the three months to January, offers some comfort as it suggests that consumers aren’t tightening their belts in response to higher interest rates or Brexit worries," says Capital Economics' Gregory.

"And if we are right in thinking that inflation will continue to fall back this year – note that the retail sales deflator has already showed signs of dropping, ticking down from 3.1% in December to 2.8% – and wage growth will gradually pick up, consumer spending should receive more fundamental support over the coming quarters."

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