Today sees the publication of one of the bedrocks of the recent UK economic improvement where lower inflation led to higher real wages which resulted in strong retail sales numbers. This has boosted Gross Domestic Product via consumption. If you go back to January 29th last year you will see that I pointed out this would be a beneficial impact on the UK economy of the oil price fall. However as I pointed out on Tuesday we are seeing the influence of that move start to wane a little and it makes us wonder about real wages and retail sales. This is reinforced by the fact that wage growth has not only not picked up it has moved between flatlining and fading.
Average weekly earnings for employees in Great Britain increased by 2.1% including bonuses.
The mostly clothes based retailer Next has weighed in on the subject already today.
The outlook for consumer spending does not look as benign as it was at this time last year. Although employment rates are at record highs, growth in real earnings (the difference between wage growth and inflation) slowed markedly from September last year. In addition, growth in output across services, manufacturing and construction all decelerated throughout the course of the year.
They also expect to do worse than the general trend.
we also believe that there may be a cyclical move away from spending on clothing back into areas that suffered the most during the credit crunch.
Indeed for a company which has been doing well the numbers are rather downbeat.
We now expect NEXT Brand full price sales growth for the full year to be between -1.0% to +4.0%, with a mid-point of +1.5%…….However at this stage we think it is best to prepare ourselves for what could be a difficult year.
Oh and did I say downbeat?
The year ahead may well be the toughest we have faced since 2008.
Some care is needed here as Next has done well and some of this will be specific to it and some to the clothing industry but of course that is a component of UK retail sales. The share price is down over 8% as I type this.
Why are so many central banks cutting interest-rates?
This week has seen several moves making I think 48 in total now for 2016. This morning has seen this which provides some insight as to what is happening in China. From Bloomberg.
The central bank lowered the benchmark discount rate by another 12.5 basis points to 1.5 percent, it said in a statement Thursday in Taipei.
It was also be remiss of me not to welcome a new member to the negative interest-rates club.
The Monetary Council of the Magyar Nemzeti Bank reduced the central bank base rate by 15 basis points to 1.20%, in effect from 23 March 2016.
This made the overnight rate some -0.05% in Hungary. Have you spotted the size of the moves ( 0.125% and 0.15%). I would make them wear a clown’s outfit if they wanted to announce such moves as who believes such a move has any material impact?
However the international scene remains troubled which has implications for us in the UK.
UK Retail Sales
Firstly the news continues to be good.
Year-on-year estimates of the quantity bought in the retail industry showed growth for the 34th consecutive month in February 2016, increasing by 3.8% compared with February 2015. The underlying pattern in the data, as suggested by the 3 month on 3 month movement in the quantity bought, showed growth for the 27th consecutive month, increasing by 0.8%.
We also see the same main driver.
Average store prices (including petrol stations) fell by 2.5% in February 2016 compared with February 2015, the 20th consecutive month of year-on-year price falls.
We are spending some 1.4% extra to get volume gains of 3.8%. Excellent! I would make all the “deflation nutters” have to write that on a blackboard in the manner of Bart in The Simpsons.
However we also are getting signs that the peak may well has passed us by.
The amount spent in the retail industry increased by 1.4% compared with February 2015 and decreased by 0.7% compared with January 2016……..Compared with January 2016, the quantity bought in the retail industry is estimated to have decreased by 0.4%.
Also we see what may have spooked Next.
In February 2016, the quantity bought in textile, clothing and footwear stores decreased by 2.4% compared with February 2015 and by 0.4% compared with January 2016.
For once the weather may genuinely be to blame but let’s not go there as it gets the blame far too often.
This is an important topic which gets little media time. It is required in the income version of the GDP numbers to make them balance with the expenditure and output ones. Believe it or believe it not but house owners are “imputed” to receive rent and this is added to GDP. In my opinion this causes a litany of problems and if you read my articles on the subject not the least of this is our lack of knowledge of UK rents inflation as the CPIH shambles uses the same data.
Yesterday saw another piece of odd behaviour in this area. From the Office for National Statistics.
The decrease in weight is being driven by three classes. The largest decrease, the Imputed Rentals class is unique to CPIH. The class has fallen by 13ppt from 178ppt to 165ppt.
So in the middle of a housing boom when they have only just told us that house prices are rising at an annual rate of 7.9% and we have estimates of rent increases of 3.3% which both far exceed inflation we see a reduction in weights! Eh? I would like to add that the Imputed Rental series has seen substantial revisions in recent years.
You may enjoy this bit as you note above that the weight has fallen because the explanation tells us this.
Further improvements to the methodology for actual and imputed rentals in the National Accounts will be introduced in BB16. The changes will result in further upward revisions in the expenditure on imputed rents, which will in turn increase the OOH weight in CPIH
Up is the new down.
Oh and never believe anything until it is officially denied.
The revision to the OOH index will therefore directly affect the relevant household expenditure current price estimates in the National Accounts, but not the volume estimates.
So you have more inflation but it does not affect volume. Odd because the past changes boosted it and GDP was Yazz right about this series?
The only way is up baby
Good job we do not rely on the GDP numbers…….
The UK Retail Sales series has been a good news story for the UK economy and I do not expect that to end but we are entering a phase which will see some slip-sliding away. If we look at the runes the price of crude oil may well be dipping again as it falls below US $40 for Brent Crude today but a return to past lows would not be as cheap after we buy it with a depreciated UK Pound £ which is below US $1.41 as I type this. However we should be grateful for what we have seen as by contrast the media hype about economic recovery in Italy has seen this reality today. From Istat.
The average of the last three months compared to the previous three months decreased by 0.1%.The unadjusted index decreased by 0.8% with respect to January 2015.
If we move to the GDP numbers then we have the issue of what to do about Imputed Rent? There are theoretical issues but today let us stay with the simple practical one that we in the UK have enormous trouble in measuring it and this song seems appropriate.
With their up diddley up-up and their down diddley down-down.Up! down! Flying around!Looping the loop and defying the ground!
Let me finish by wishing you all Happy Easter and a good news story from Dave Grohl of the Foo Fighters who responded to a call for help with this letter to Cornwall Council.
I believe that it is crucial that children have a place to explore their creativity and establish a sense of self through song. The preservation of such is paramount to the future of art and music. Without them, where would we be?
If you want to know more about the UK current account and its problems in an audio format here is a piece I did for Share Radio.
Meanwhile if we move to the world of video here is me on TipTV discussing central banking policy.