February 7, 2017 7:45:36 pm
The first post-Brexit vote cracks may be emerging in consumer spending, the cornerstone of Britain’s economy, with a series of downbeat retail surveys suggesting inflation pressures are starting to weigh on households. Britain’s economy outperformed expectations after the June 23 vote to leave the European Union, finishing 2016 with the fastest growth among any of its large, advanced-economy peers.
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But economists polled by Reuters think the economy will slow markedly this year, mainly because consumer spending looks set to weaken under the strain of higher prices following the pound’s near 20 percent slump against the dollar. Gauges of retail sales – which can be volatile month to month and sometimes contradict each other – are now pointing in the same direction, potentially an early sign that this slowdown may be starting to take effect.
The latest report from the British Retail Consortium on Tuesday showed retail sales in cash terms grew at the weakest pace for any November to January period since 2008/2009, when Britain’s economy was its low point after the financial crisis. The Confederation of British Industry’s retail sales balance for January suffered the sharpest one-month drop since records began in 1983, while a European Commission survey of the retail sector and official data for December also weakened.
Bank of England officials will view the figures as justification for their view that household spending looks set to weaken from last year, despite rowing back on some of its more pessimistic forecasts that followed the Brexit vote. Last week BoE Governor Mark Carney admitted the central bank had been wrong-footed by the strength of consumer spending, thanks to a strong labour market and cheap credit.
“Now that dynamic will start to be tested as this year progresses,” he said at a press conference following the BoE’s policy decision on Thursday, during which he stressed that the outlook for wages would be key. For most economists, the only question is how much consumer spending will ebb in the coming months, given it has been driven by rising wages, which will soon be eaten away by surging inflation.
The possibility that consumers may have front-loaded spending to beat the onset of higher prices, or taken advantage of record low interest rates to borrow now rather than later, add to the list of question marks. “I think it’s worth saying that all of these should make me relatively pessimistic about what happens this year,” said London School of Economics professor Charles Bean, a former BoE deputy governor, at Fathom Consulting’s Monetary Policy Forum hosted by Thomson Reuters last week.
There is little doubt rising prices are on the minds of consumers – a source of concern in itself as their spending accounted for a full 63 percent of economic output in 2015. Google Trends data show that “inflation” as a search engine term hit an almost five-year high early this year, while consumer sentiment surveys from data company Markit and from the European Commission have also recorded rising concern about inflation.
The BRC survey and Kantar Worldpanel supermarket data published on Tuesday also suggested consumers are now having to pay more for essential goods, which suggests discretionary spending could falter soon. “The strength of retail sales in the autumn – which prevented GDP growth from slowing after the referendum – appears to have reflected consumers bringing forward expenditure from 2017, due to anticipated price rises,” said economist Samuel Tombs at Pantheon Macroeconomics.
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