- While showing marginal improvement to a 10-month high, the February CBI distributive trades survey does not do much to advance the case that the rise in consumer confidence following December’s decisive election has lifted their willingness to spend. Hopes that consumers have become more prepared to spend were given a lift by hard data from the ONS showing retail sales volumes rose 0.9% month-on-month in January after weakness through the fourth quarter of 2019.
- A key factor for growth prospects is if the improvement in consumer confidence will continue, and if it will ultimately translate into greater willingness to spend on a sustained basis.
- The fundamentals for consumers are likely to be pretty decent over the coming months, with employment high and real earnings growth at a reasonable level. Employment rose 180,000 in the three months to January, to be at a record high of 32.934 million while real earnings growth was a respectable 1.4%. Nevertheless, earnings growth has moderated since mid-2019 and EY ITEM Club suspects that employment growth is likely to be lower overall in 2020 than in 2019.
- 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. The Budget could also well contain other supportive measures, including raising the threshold for paying national insurance.
- Moderate inflation should also be helpful to consumers over 2020. While it spiked to a six-month high of 1.8% in January from a 37-month low of 1.3% in December, it still looks likely to trend back down to around 1.3% by mid-2020 and EY ITEM Club expects it to average a modest 1.5% over 2020.
- There are factors which may limit 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.
- Retailers are hardly optimistic about sales prospects for March with a balance of -3% expecting sales to be up year-on-year.
- On a positive note, retailers are planning to raise their investment in the year ahead for the first time in two years. This was driven by large firms and specific sectors (notably grocery, clothing and non-store retailing). The CBI observed large retailers in particular are being influenced by shifts online and the trend for re-purposing retail space.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The February CBI distributive trades survey showed a marginal improvement in retail sales to the highest level since last April.
“The balance of retailers reporting year-on-year growth in sales volumes edged up to a 10-month high of +1% in February from 0% in both January and December. The balance had previously risen to 0% in December from -3% in November, -10% in October, -16% in September and -49% in August. This had been the lowest reading since December 2008 and the second lowest since the survey began in 1983.
“However, a balance of 14% of retailers said sales in February were below average for the time of year.
“The CBI reported that there were varying performance across retail sectors in February. Grocers and non-specialised stores enjoyed rising sales volumes but there were declines in other sectors, primarily clothing.
“Growth in internet sales slowed to a below-average rate in February.
“Retailers are hardly optimistic about sales prospects for March with a balance of -3% expecting sales to be up year-on-year in the month.
Retail sales picked up in January after poor Q4 2019
“Retail sales volumes rose a healthy 0.9% month-on-month in January. This was the largest rise since March 2019. Furthermore, sales volumes were up 1.6% month-on-month excluding fuel sales – the best performance since May 2018.
“January’s rise in retail sales follows a particularly poor performance over the latter months of 2019 when consumers seemed to be particularly cautious amid heightened domestic political and Brexit uncertainties. Indeed, retail sales volumes fell 0.9% quarter-on-quarter over the fourth quarter of 2019 with December’s drop of 0.5% month-on-month marking the fourth time in five months that retail sales had fallen.
“Consequently, retail sales volumes were only up 0.8% year-on-year in January. Excluding fuel sales, the year-on-year increase was 1.2%. Furthermore, retail sales were still down 0.8% in the three months to January compared to the three months to October.
Outlook for consumer spending
“While showing marginal improvement, the February CBI distributive trades survey does not really do much to advance the case that the marked rise in consumer confidence following December’s decisive election has lifted their willingness to spend. The 0.9% month-on-month rise in January retail sales volumes had suggested this could be the case.
“Consumer confidence has clearly picked up since December’s election; this is evident in a number of surveys. GfK reported consumer confidence rose to a 16-month high in January from November's equal lowest level for 2019 (and since mid-2013). Additionally, the February IHS Markit’s household finance index showed consumers were the most upbeat about their finances since the survey began 11 years ago.
“Latest data show average annual earnings growth moderated to 2.9% in the three months to December (compared to an 11-year high of 3.9% in the three months to July 2019) with regular earnings growth at 3.2% and we suspect it is likely to stabilise around 3.2%. Despite consumer price inflation dipping to a 37-month low of 1.3% in December, ONS data indicated that real earnings growth moderated to 1.4% in the three months to December after rising to 2.0% in the three-months to June 2019 from just 0.1% in the three months to June 2018. The recent moderation in regular earnings growth has been less pronounced; it was 1.8% in the three months to December compared to a peak of 2.0% in the three months to June.
“Disappointing news for consumer purchasing power saw consumer price inflation spike to a six-month high of 1.8% in January from a 37-month low of 1.3% in December, but it still looks likely to trend back down to around 1.3% by mid-2020 and we expect it to average a modest 1.5% over 2020.”