Of UK Retail Sales and a 5% cut in real interest-rates

A feature of my career and time working with and analysing finance and economics has been the fall in interest-rates and yields. This of course has ended up with us now facing a period where more than a few interest-rates and bond yields are in fact in negative territory. My subject of yesterday France has a central bank ( ECB) with a deposit and current account of -0.4% and its 2 year bond yield is -0.5%. But let me give you some perspective from the Bank Underground blog of the Bank of England.

Real interest rates have fallen by around 5 percentage points since the 1980s.

Eye-catching is it not? Just to break this down they were 0% in the 1970s, 4.7% in the 1980s, then 1.9% up to the credit crunch and since 2009 have been -1.3%, Oh and that is 6% and not 5% by the way. For clarity this is for the United States one year yield minus how inflation turned out to be in that year.

So in the period since the 1980s we have seen, as I have pointed out quite a few times before quite a stimulus applied to the world economy and of course a fair bit of this has come in the credit crunch era. We then face a rather awkward conundrum because the supposed cure of lower interest-rates and yields is in response at least in part to the problems created by lower interest-rates and yields! A sort of doubling the dose response to an addiction. How does that usually work out?

Of course some want ever more as I note individuals like Kenneth Rogoff who want to ban as much cash as they can as they fear that they will not be able to repeat the “cure” next time around. This plainly means interest-rates going even more negative and more places seeing them. For example the UK now has a Bank Rate of 0.25% after over 3 years of pretty solid economic growth so what happens when the next recession turns up? Such thoughts have the problem of why a cure needs to be repeated so often at ever higher dosages and with ever more side-effects?

As to the causes of this the Bank Underground tries to dismiss fears over secular stagnation by pointing out this.

In the late 1930s, Alvin Hansen developed the term “secular stagnation” to describe his concerns that structural factors such as stagnant technological development and weaker population growth prospects would weigh on growth permanently.  We know now that these concerns over secular trends proved misplaced, and played little role in weaker growth.

Rather ominously that was really only changed by the second world war which is hardly a hopeful precedent! The author hopes that things will get better so lets join him in that but the truth is we are much less sure and there is a sort of unmentioned sword of Damocles hanging all over this which is Japan where the lost decade has become the lost decades.

Although the author would not put it like this there is quite a critique of current Bank of England policy tucked away in the blog.

When agents assign a low probability to the central bank remaining hawkish towards inflation, real rates must rise by a significantly larger amount in response to a given shock to stabilise inflation.  The required response decreases as credibility improves.

So as the credibility of Forward Guidance is only for the credulous now and the Bank of England plans to “look through” rising inflation then the logic applied there suggests real rates will have to rise substantially. Awkward.

Retail Sales

Speaking of rising inflation there was this in the data released this morning.

Average store prices (including fuel) increased by 1.9% on the year, the largest contribution to this increase came from petrol stations, where year-on-year average prices were estimated to have risen by 16.1%.

Regular readers will be aware that I was ahead of the pick-up in retail sales in the UK and quite a few other places by explaining that the lower inflation driven mostly be lower crude oil prices would raise consumption via a boost to real wages. So we are now beginning to see the mirror image of that relationship. It was only on Wednesday that I pointed out the real wage growth was fading and on some inflation measures had now gone negative. The price rise was just not from fuel as this from the food sector shows.

In January 2017, prices increased by 0.5% compared with December 2016, the largest month-on-month rise since April 2013, while the year-on-year increase of 0.2% is the highest since June 2014,

Thus the numbers today are not the surprise they have been presented as.

Month-on-month the quantity bought is estimated to have fallen by 0.3%.

If we look for more perspective we see this.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 0.4%; the first fall since December 2013.

In annual terms there is still growth but it has faded substantially for the heady days of late 2016.

In January 2017, the quantity bought in the retail industry is estimated to have increased by 1.5% compared with January 2016, the lowest growth since November 2013.

Actually so much of the change can be found in the sector where prices have risen the most.

The year-on-year increase in fuel stores is the largest rise since September 2011, contributing to the strong growth seen in the amount spent in fuel stores on the year. However, the quantity bought has decreased following the rise in fuel prices, suggesting that consumers are more cautious with spending in this sector.

Have readers noticed less traffic on the roads?


There was some good news here albeit with an odd kicker.

Overseas residents made 9.2 million visits to the UK in the 3 months to December 2016. This was 6% higher than the same 3 months in 2015. The amount spent on these visits was unchanged at £5.3 billion.

It is no great surprise that the lower UK Pound £ has led to more visitors but I am curious that they spent no more. For a start how do we know? Does someone follow them into every shop? Also this goes against the argument made by some that past retail sales growth in the UK was added to by foreign purchasers using lower price for them.

Whatever the state of play there we do seem to be seeing more US tourists as we wonder if Trump fears are higher than Brexit ones?

Visits from North America increased by 15% in the 3 months to December 2016, when compared with the same 3 months in 2015.


We see that we have been living our lives in an extraordinarily favourable interest-rate environment. Many reading this will have lived their whole lives in it. The catch is that it has ended up being associated with trouble on two fronts. Firstly it did not avert a credit crunch and in fact ended up contributing to it and secondly if it was a cure we would not be where we are. Although care is needed as there were plenty of economic gains back in the day. As for now well some old fears have reappeared.

More Americans fell behind on their car loan payments in the fourth quarter, bringing auto delinquencies to their highest since the height of the financial crisis, Federal Reserve Bank of New York data released on Thursday showed…….

In the fourth quarter, $142 billion in car loans were generated, giving 2016 the most auto loan originations in the 18-year history of the data, the New York Fed said.

Auto debt hit $1.16 trillion, with a $93 billion rise over the year.

Sub-prime car loans anyone?

If we move to the UK then the consumer surge is fading. The numbers are erratic and influenced by the rise in the price of fuel but even taking that out annual growth fell to 2.6%. It remains a shame that the Bank of England last summer contributed to the inflation rise via the way that their rhetoric and Bank Rate cut and QE pushed the UK Pound £ lower. Before this is over I expect what was badged as a stimulus to turn out to be the reverse via its impact on real wages.


22 thoughts on “Of UK Retail Sales and a 5% cut in real interest-rates

  1. Hello Shaun,

    It was never a cure for the people was it ?

    Can I get a load at -0.4% from the ECB ?

    I can’t get a load at 0.25% either from anyone.

    HMG and the Banks, ah that’s another matter – follow the money


    • Hi Forbin

      No it is not for us plebs. We live in a bankocracy where interest-rate are cut to bail out the banks and then the banks complain they cannot make profits because they are so low. Meanwhile I note that the latest UK bank subsidy has built up to £38.5 billion now, how much is that each?

  2. I have been anticipating a sub prime car loan for some time now. I wonder if they bundle the debts and sell them on as a sound investment in the same way that housing debt was traded?

    • considering the same “talent” is in charge I think this will be another “surprise!,surprise ! ” moment , don’t you ?


    • Sub prime car loans were packaged and traded prior to the 08/09 great crash. The generalised statement provided by Shaun on the supposed “time to panic” sub prime auto loan delinquencies is inadequate to formulate any kind of valid opinion, i.e. “..bringing auto delinquencies to their highest since the height of the financial crisis” – what does that mean exactly?

      Does it mean the value of auto delinquencies is at it’s highest since the height of the financial crisis or is it the percentage? It’s the percentage that counts and quite frankly I haven’t the time to waste researching it to find out as the shock will come from the housing market, not the auto loan industry.

  3. ‘Firstly it did not avert a credit crunch and in fact ended up contributing to it and secondly if it was a cure we would not be where we are.’

    Furthermore,worth noting we’re not out of the woods yet and it you can only really assess the car crash properly once it’s over and the bumper’s have come to rest in the field beside the road.

    Worth noting Zero Hedge have been commenting heavily on sub prime car loans for some time.While they have called fifteen of the last two recessions,some of their data is top draw.

    ‘Auto Bubble Burst Begins As Subprime Delinquencies Soar To 2009 Levels’
    ‘Certainly, a quick look at the 61+ day delinquencies in General Motors’ subprime securitization book would seem support our rather negative thesis on future auto sales with January 2017 delinquency rates soaring to the highest levels since late 2009 / early 2010. ‘

        • Yes, Private Fraser, it is the same person. I agree. Ed Harrison is brilliant. He no longer seems to be with Boom Bust; it is a real shame as it is a much poorer show without him. He was part of the RT team providing the election night coverage for the US presidential election. He made excellent comments about how the so-called booming US economy actually wasn’t performing on all cylinders and had left a lot of people behind.

    • The other problem for car finance, which goes beyond straightforward delinquency rates, is that lots of financing schemes assume a certain resell value for the car after a set time to make the maths work. Finance has meant that car sales have been very strong in the past few years so we will see a glut of second hand models putting downward pressure on prices. This will cause even more problems for car loans going forward.

      • I have known many many people in the UK (which may differ to the US) whom have taken such loans, which effectively amount to a rental agreement as the dealer has included in the contract a final lump sum adjustment value or, failing the “purchaser” taking up the option to pay the final balance, a re purchase price, usually in 3 years.

        The “adjustment value” has usually looked right for a concourse condition 3 year old motor with low mileage, i.e. very expensive but the re purchase price by the dealer is way below that of a rough condition motor value as shown in Glass’s guide. Furthermore, these contracts go on to state that an examination will be carried out by the dealer if they are to re purchase the car to “make any relevant adjustment”. You may rest assured that the adjustment will not be in an upwards direction. Indeed, a couple of people I know have requested repurchase and the dealer has applied immense reductions to an already cheap price for the slightest of scratches or paint chips. Thus, any fall in residual market value below the notional repurchase price in the original contract is easily covered by the very low real market value price offered by the dealer.

        In reality, all those I know have simply plumped for a further loan trading in the old car against the new, but, interestingly the new contract never states the trade in value of the old car but simply expresses the new cash deposit to be provided alongside a description of the car being traded in, but no trade in value is mentioned and the new monthly payment is quoted along with the the final balance purchase price in 3 years etc.

        The point is that if US auto loans are structured in the same way as UK auto loans it’s very difficult for the dealer and loan company (whom usually have ties or at least a reciprocal arrangement re the secured loan) to lose even in the event of a collapse in market prices

  4. Shaun,
    Is this the year inflation meets demand deficit and producers have to decide if pricing is more important than market share? If this is the case then the last panic interest rate cut by the BoE will leave it with little room to manoeuver other than negative rates and its failure highlighted.

    • Hi Chris

      Yes there will be a squeeze on both consumers and producers this year. There will also be some spoofing as for a fair bit of what we buy the product is only a small percentage of the price. I am not convinced that interest-rate cuts down at these levels achieve much anyway, but they can do harm.

  5. Hi Shaun and thanks for another interesting blog.
    This is what I was expecting but didn’t know the car loan situation was quite so dire.
    That said I sill wonder if in a few weeks time more will be spent on credit or are people really maxed out?
    I can imagine the press talking about low rates,better weather, pent up demand and all the usual rubbish and reasons they give.
    It’s just seems to happen again and again but perhaps not this time as inflation begins to bite..

    • Hi Midge and thank you

      UK retail sales numbers have been an erratic monthly series for as long as I can remember. However they can establish a trend on a quarterly or half-yearly basis and I expect that to head downwards. Maybe the unsecured credit boom will help but not of course for cars as Governor Carney calls that “secured credit”, I wonder if the US Federal Reserve thinks the same?

  6. HI Shaun,
    I remember when TARP was launched Goldman Sachs estimated the face value of car loans was higher than the value of sub-prime residential mortgages. Although the expected loss rate on car loans was much lower . Car loans totalled $1.1trillion; sub-prime mortgages were $900billion.
    I think total TARP was $9.3trillion., with US banks holding about $5.7trillion.

    TARP – Troubled Arses Relief Program my neighbour called it; purely for the benefit of bankers.

    • Hi Eric

      As to the latest numbers here is the NY Fed.

      “Aggregate household debt balances grew in the fourth quarter of 2016. As of December 31, 2016, total household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. Overall household debt is now 0.8% below its 2008Q3 peak of $12.68 trillion, and is 12.8% above the 2013Q2 trough.
      Mortgage balances, the largest component of household debt, which stood at $8.48 trillion as of December 31, saw a $130 billion uptick from the third quarter of 2016.
      Balances on home equity lines of credit (HELOC) were roughly flat, rising $1 billion to $473 billion.
      Non-housing debt balances rose in the fourth quarter; with increases of $22 billion in auto loans, 32 billion in credit cards, and 31 billion in student loans.

      if you look at the data then auto loans rose to US $ 1.16 trillion and something else we look at with concern is student loans at US $1.31 trillion.

      • The record level of US student debt was reported in the NZ Herald, which included this –
        The problem could be even worse than the New York Fed’s data suggest. The report is based on a sample of household credit reports, which regulators have found are often filled with errors. The Federal Reserve Board in Washington has total student debt pegged higher, at $1.41 trillion.

  7. Shaun, It was eye brow raising to see both the car loan debt and delinquency in the US. If you are a driver in the UK you will have noticed an almost complete refresh of the motors on our road in the last 2-3 years, I just wonder if anyone actually bought them?

    • Hi Paul

      I am sure someone did somewhere :). We did get a hint from the UK SMMT in its latest registrations release though “provided interest rates remain low ” . Not only loans but of course leasing depends on this.

  8. Great blog as usual, Shaun.

    You write on foreign tourist spending: “It is no great surprise that the lower UK Pound £ has led to more visitors but I am curious that they spent no more. For a start how do we know? Does someone follow them into every shop?” I think you were just being jocular. The data comes from the International Passenger Survey (IPS), conducted on a daily basis by the ONS. So it would represent self-reporting by the tourists on what they spent, as far as they could remember. Could these self-reported estimates be subject to real or imagined incentives to under-report to escape duty?

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