After a string of worrying data releases, UK analysts had reason to cheer this week as official data showed that retail sales went through the roof.
Retail sales rose by 1.9% from August to September, leaving them 6.5% higher than they were in the same month last year.
British wages have been picking up, and inflation is at zero, but even that doesn’t justify such an explosive rise.
Jeremy Cook, chief economist at payments firm World First titled his response “swing low, sweet shopping trolley.”
But there’s an increasing worry about whether anything else is actually driving the UK recovery right now.
Business investment was revised down in the second quarter of the year, with a rise of just 1.9% on the quarter, and export growth was cut too.
During its last assessment of the British economy, credit ratings agency Standard & Poor’s warned the UK over its “twin deficits.” In short, the UK is a major importer of both goods and capital, as well as having a significant government budget deficit.
It’s no secret how Britain’s consumer recovery manages to outstrip wage growth. Even the government’s Office for Budget Responsibility believes that the recovery will lead to climbing household debt (or vice versa):
Finance professor Michael Pettis lightly mocked David Cameron over Chinese President Xi Jinping’s visit to the UK this week, and the promotion of massive foreign investment into the country, noting that this will only exacerbate one of the country’s major deficits.
The UK’s purchasing managers’ indices (PMIs), which track business output and come out months ahead of the official data, slipped to the lowest level since April 2013 in October. That signals a slowdown in GDP growth to around 0.5% — though the relationship between the two isn’t perfect.
Analysts breathed a sigh of relief when the strong retail sales figures came out, but not everyone thinks it can last.
Pantheon Macroeconomics’ chief UK economist has a compelling thesis about what’s going to happen to the British recovery. He thinks that while there were some one-off effects in September, like the Rugby world cup, sales should stay strong for a few months yet.
But they can’t stay strong indefinitely, according to Tombs. The strengthening pound (which cut import costs) has stalled, tax and welfare changes will trim household income by 0.7% in April. In a note earlier in the week, Tombs noted that last time the government front-loaded fiscal austerity, the Bank of England was ready to push through more quantitative easing. This time, it’s more likely to hike interest rates.
Here’s the kicker:
This time, the U.K. consumer isn’t going to live up to its reputation as the economy’s saviour when the other components are struggling. We expect growth in retail sales volumes to ease to about 2.5% in 2016, from around 4.2% this year. That’s a substantial hit, and it’s at the core of our overall 2016 slowdown story. We look for GDP growth of 1.5%, after 2.4% this year.
That 1.5% forecast is quite a lot lower than most other expectations — the Bank of England, for example, expects a 2.6% boost. A 1.5% rise would be the weakest since 2012.
One of the British economy’s persistent hallmarks is a reliance on spending, and despite constant promises from governments that the balance will be redressed, the British consumer is definitely powering the recovery right now — and if it does stall, there’s not much else to pick up the slack.
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