- It is still early days to see what impact December’s decisive General Election result and imminent UK exit from the EU on 31 January with a deal has on consumer behaviour. The initial signs are that it has lifted confidence but this – so far at least – has not translated into higher spending.
- The CBI distributive trades survey pointed to stable, lacklustre retail sales in January, thereby suggesting that the decisive General Election result failed to give an imminent boost to consumer spending, despite surveys showing a rise in confidence.
- The lacklustre January CBI distributive trades survey follows on from a very disappointing retail sales performance over the Christmas period and indeed the fourth quarter of 2019. It is clear that consumers adopted a more cautious approach over the fourth quarter amid heightened domestic political, economic and Brexit uncertainties. Meanwhile, there has been some slippage in consumer fundamentals after steady improvement through to mid-2019. Latest ONS data show that real household disposable income fell 0.5% quarter-on-quarter in the third quarter of 2019 after a gain of 0.9% in the second quarter, thereby reducing year-on-year growth to 0.9% from 1.6%.
- The Bank of England may be modestly disappointed that the January CBI distributive trades survey does not signal a pick-up in retail sales and the survey will likely fan expectations that the MPC could well vote to cut interest rates from 0.75% to 0.50% on Thursday. It remains a very tight call, but we believe there are enough signs overall of improving economic activity for the MPC to sit tight and remain in “wait and see” mode.
- The fundamentals for consumers are likely to be relatively decent over 2020, although we suspect that earnings growth will remain below the peak level seen in mid-2020 and that employment gains will be modest overall. However, consumer spending power should benefit from low inflation over 2020 (we expect it to average 1.5%; it was at a more that three-year low of 1.3% in December) while some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April.
- There are other factors which may limit the consumer spending. In particular, with uncertainties far from over and the savings ratio still relatively low, many consumers may be keen to avoid dissaving. Meanwhile, lenders have reduced the availability of unsecured consumer credit and tightened lending standards.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The January CBI distributive trades survey shows stable retail sales.
“The balance of retailers reporting year-on-year growth in sales volumes remained at 0% in January, which matched December’s highest reading since last April. The balance had previously risen to 0% in December from -3% in November, -10% in October, -16% in September and -49% in August (which had been the lowest reading since December 2008 and the second lowest since the survey began in 1983).
“A balance of 7% of retailers said sales in January were below average for the time of year – but this was less than the 31% that had seen sales as poor in December.
“The CBI reported that the strongest positive contribution to volumes growth in January came from non-specialised stores (i.e. department stores). This was offset by negative contributions from retailers of other normal goods (i.e. jewellery, flowers and watches), household furniture, and from hardware & DIY stores.
“The CBI reported growth in internet sales picked up in January and was in line with the average.
“Retailers are hardly optimistic about sales prospects for February with a balance of 0% expecting sales to be up year-on-year in the month.
Retail sales poor in December and over fourth quarter of 2019
“Retail sales volumes disappointingly fell 0.6% month-on-month in December. This followed a 0.8% drop in November and marked a record fifth successive month that retail sales had either fallen or been flat. The year-on-year increase in retail sales volumes was limited to just 0.9% in December, although this was up marginally from 0.8% in November, which had been the lowest annual growth rate since April 2018.
“There had been speculation that the November performance had been adversely affected by the relatively late Black Friday despite the ONS attempts to allow for this (it occurred on 29 November while the ONS reporting period for November retail sales was 27 October – 23 November) and that this would be reflected in a bounce back in December. However, this was clearly not the case and consumers were clearly very reluctant to spend over the crucial Christmas period.
“Indeed, retail sales volumes fell 1.0% quarter-on-quarter in the fourth quarter, which was the weakest performance since the first quarter of 2017.
Outlook for consumer spending
“It is still early days to see what impact December’s decisive General Election result and imminent UK exit from the EU on 31 January with a deal has on consumer behaviour.
“The initial signs are that it has lifted confidence but this – so far at least – has not translated into higher spending.
“The fundamentals for consumer confidence are likely to be pretty decent for consumers over the coming months, although annual earnings growth is unlikely to match the 11-year high of 3.9% that was seen in the three months to July 2019 and employment growth will probably be lower overall in 2020 than in 2019.
“Average earnings growth moderated to 3.2% in the three months to November and we suspect it is likely to stabilise around this level. We also suspect that employment growth will be relatively modest over 2020.
“However, good news for consumer purchasing power saw consumer price inflation fall to a more than three-year low of just 1.3% in December and we suspect it will remain low over 2020 averaging around 1.5%.
“Some consumers will benefit from April 2020 from the ending of the four-year freeze on working-age benefits. It has also been announced that the National Living Wage will rise 6.2% in April.
“There are other factors which may limit the consumer spending. In particular, with uncertainties far from over and the savings ratio still relatively low, many consumers may be keen to avoid dissaving. Meanwhile, lenders have reduced the availability of unsecured consumer credit and tightened lending standards.”