Retail Sales continue to be a bright spot for the UK economy

Today brings us up to date on the UK retail sector but before we get to it there is something that will have the full attention of the Bank of England. Let me hand you over to City-AM.

The Royal Bank of Scotland was hit this morning on the news that two brokers had lowered their forecasts for the company’s shares.

Analysts at Macquarie downgraded the company from buy to neutral this morning, slashing its target price to 201p, from 246p.

Meanwhile, Goldman Sachs reiterated its buy rating on the stock, but lowered its target price to 325p from 360p.

Shares were trading down around eight per cent to 182.5p.

Firstly at least I warned you as those who read my post on the sixth of this month will be aware. The theme of the credit crunch era has been that RBS is always about to turn a corner ( as in a way highlighted by a 360p price target) but the path turns out to be this one.

We’re on a road to nowhere
We’re on a road to nowhere
We’re on a road to nowhere

If you believed Brewin Dolphin on the 6th you may be wondering what happened to the ” path to redemption”? Also those with longer memories may be wondering about the “nest egg”

City Minister Lord Myners yesterday claimed that the ownership of RBS and LBG – which were both rescued from collapse by the Treasury in the credit crisis – represented a “nice little nest egg” for the taxpayer. ( Evening Standard September 2009)

I have picked this out for a reason because the Ivory Tower of the Bank of England has trumpeted the “Wealth Effects” of its policies whereas RBS has been a spectacular case of wealth destruction. I can widen this out as Barclays is at a recent low at 138 pence reminding me that the chairman who promised to double the share price has gone I think, which is for best because it has halved. The Zombie Janbouree continues with HSBC below £6 and Lloyds at 59 pence.

This is way beyond just a UK issue as for example the European banks are in quite a mess headlined by Deutsche Bank falling back below 6 Euros this morning. Or in some ways more so by the Spanish banks as the economy is still doing well but they look troubled too. Here is Mike Bird of the Wall Street Journal.

Japanese regional bank share prices have now broken below their Feb 2016 lows. The sector is, to use the technical terminology, completely screwed.

This is quite a change of approach from Mike who is something of the order of my doppleganger on Japan. Anyway my point is that the them here is that there have been no wealth effects from the banks and more seriously they cannot be supporting the economy.

The official Bank of England view is that banks are “resilient” and it is “vigilant”

Bond Yields

On the other side of the coin support is being provided by another surge in the UK Gilt market. These are extraordinary times with the UK having a ten-year yield of 0.44% and a five-year yield of 0.35%. Those who have owned UK Gilts have seen extraordinary gains and this includes the ordinary person with pension savings. However this is no silver bullet as we would be in a better place than we are if it was, But it does support the economy.

Whilst I am looking at this area let me deal with all the inverted yield curve mania going on via a tweet that proved rather popular yesterday.

Some worry about the yield curve ( 2s/10s) being inverted but I am sanguine about that. This is because when it bought £435 billion of UK Gilts the Bank of England distorted the market giving us an example of Goodhart’s Law.

It does not buy two-year Gilts thereby distorting the market and making past signals unreliable.

The Bank (as agent for BEAPFF) purchases conventional gilts with a minimum residual maturity of greater than three years in the secondary market.

Retail Sales

This morning has brought another good set of retail sales figures for the UK.

The quantity bought in July 2019 increased by 0.2% when compared with the previous month, with strong growth of 6.9% in non-store retailing.

The duff note there is the implication for the high street but the numbers below confirm that the situation for the UK economy overall remains positive.

In the three months to July 2019, the quantity bought in retail sales increased by 0.5% when compared with the previous three months, with food stores and fuel stores seeing a decline…….Year-on-year growth in the quantity bought increased by 3.3% in July 2019, with food stores being the only main sector reporting a fall at negative 0.5%.

The positive spin in the decline of the high streets is provided by this.

In July 2019, online retailing accounted for 19.9% of total retailing compared with 18.9% in June 2019, with an overall growth of 12.7% when compared with the same month a year earlier.

The flipside is that less money flows through the high street and sadly I suspect this is not a new trend.

Department stores’ growth increased for the first time this year with a month-on-month growth of 1.6%; this was following six consecutive months of decline.

Comment

Let me shift now to why is this happening? The situation regarding the UK consumer is strong and has been supported by several factors. The first is in the numbers themselves and repeats a theme I first highlighted on the 29th of January 2015.

Both the amount spent and the quantity bought in the retail industry reported strong growth of 3.9% and 3.3% respectively when compared with a year earlier.

That gives us an ersatz inflation measure of the order of 0.6% which made me look it up and the official deflator is 0.8%. That is very different to the ordinary inflation measures we see which are 2%-3%. So in a sense your money goes further ( strictly declines in value more slowly) and is compared to this.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.7% for total pay (including bonuses) and 3.9% for regular pay (excluding bonuses).

So in real terms there are gains in this sector. Thus it is no great surprise it has done well.

Also there is the fact that whilst the annual rate of growth has slowed we are still on something of an unsecured credit orgy.

The additional amount borrowed by consumers to buy goods and services was £1.0 billion in June, compared with £0.9 billion in May…….The annual growth rate of consumer credit continued to slow in June, falling to 5.5%

Is anything else growing at an annual rate of 5.5%.

Cauliflowers

There seems to be something of a media mania here as this from BBC Essex illustrates.

“Customers I’ve never seen before are coming in just for cauliflowers” Great Baddow greengrocers Martin and George Dobson are selling imported cauliflowers at cost price as Britain experiences a shortage. Prices have reached £2.50

I checked in two local supermarkets and they were selling then for £1 albeit they were from Holland. Then I went to Lidl and they were selling UK cauliflowers for 75 pence. Maybe a bit smaller than usual but otherwise normal so I bought one.

22 thoughts on “Retail Sales continue to be a bright spot for the UK economy

  1. hello Shaun,

    so when the going gets tough the tough go shopping ……… for cauliflowers ?

    apparently 39 pence in 1999 and now 75 pence ( no idea on weight) 92% over 20 years……

    so roughly 9% a year…….. good job CPI kept up, ummmm

    Forbin

    • Hi Forbin

      Using the Mail RPI inflation calculator 39 pence in 1999 would be worth 67.51 today !
      https://www.thisismoney.co.uk/money/bills/article-1633409/Historic-inflation-calculator-value-money-changed-1900.html

      When you look at property its gone up multiple fold so cauliflower’s actually been a poor investment and worse still they don’t keep very well and wouldn’t look too good after 20 years!

      The moral of this story is food is for eating, property is an investment over a long period of time.

      • Hello Peter,

        it more of supposed indication of the devaluation of the pound in your pocket example thing.

        yah , housing has been boosted though , must save those banks !

        BoE keeps looking for inflation , in the wrong place and when it is seen it’s apparently a visage ….. very strange…….

        Forbin

    • Hi Forbin,
      Not wishing to nit pick but 92% increase over 20 years is 3.3%p.a.!!! Not ever wishing to give the Bank of England a break I think the other price of £1 is more realistic -just don’t get me started on the price of beer!

      But £1.00 now from 39p gives an annual rate of 4.8%, which is probably closer to real world figures than the bank’s fantasy world.

  2. Shaun,
    So
    Q1
    “In the three months to July 2019, the quantity bought in retail sales increased by 0.5% when compared with the previous three months, with food stores and fuel stores seeing a decline…….Year-on-year growth in the quantity bought increased by 3.3% in July 2019, with food stores being the only main sector reporting a fall at negative 0.5%.

    Looking at the latest trend in the 3 months data isn’t that quite a deterioration?

    Q2
    “Let me shift now to why is this happening? The situation regarding the UK consumer is strong and has been supported by several factors. The first is in the numbers themselves and repeats a theme I first highlighted on the 29th of January 2015.
    Both the amount spent and the quantity bought in the retail industry reported strong growth of 3.9% and 3.3% respectively when compared with a year earlier.
    That gives us an ersatz inflation measure of the order of 0.6% which made me look it up and the official deflator is 0.8%. That is very different to the ordinary inflation measures we see which are 2%-3%. So in a sense your money goes further ( strictly declines in value more slowly) and is compared to this.”

    If inflation is 0.6% how does this affect a stores margins? It may be more difficult to quantify but I suspect there has been a lot of discounting due in part to poor weather compared to last year but my guess is margins are under serious pressure in the retail sector and that is why Marks & Spencer has broken its 5 year low share price and Sainsburys is looking in poor health!

    As for the yield curve the markets are taking fright lately fleeing to safer assets.

    Its looking more and more likely a meltdown coming imo financial crisis number 2!

    One more observation on retail sales its possible they have been strong year on year Joe Public buying now before things go worse and the weak £ pushes up prices. I suspect the retail sector just getting rid of old stock new stock could be far higher!

    In actual fact apart from food I’ve bough most of my white goods this year just in case imported goods are priced higher and to also batten down the hatches if things go far worse.

    Cash is no good in the bank if the rates go negative!

    • now I wonder why the CB have a war on cash…..

      no!, you don’t think ……do you ?

      Forbin

      PS: Gold is no good either , we have a register of owners and for the public good they will give it up for promissory notes ( and those nice chaps in uniform at the door are just there to protect you …. honest ! )

      • I’d posit gold (silver) are excellent choices, despite the “register”. They won’t send ’round the boys, too expense and inefficient (“I pawned it years ago, officer!”) – more likely they’ll ban/control PM trade. But, before that stage of the collapse, you’ll (hopefully) have smuggled your stash out of the new world order dystopia (in stages, as there is already a poxy €10000 limit for travel) and be sitting pretty in the small island refurge of your choice.

  3. Guardian article highlights a couple of points I raised earlier:
    1.
    “In the three months to July, retail sales rose by 0.5% when compared with the previous three months, down from 0.7% growth previously.”

    2.

    “Sales volumes likely will fall back in August, given that some shoppers probably brought forward planned purchases to take advantage of the temporary discounts offered by Amazon. Nonetheless, we still think consumers can be relied upon to steady the ship.”

    https://www.theguardian.com/business/2019/aug/15/online-shoppers-and-amazon-prime-day-boost-uk-retail-sales

    With food flat and other sales up it looks to me like consumers are buying now with warnings of inflation to hike prices later on and I suspect retail sales will perform poorly going forward.

    • Hi Peter

      I am afraid that The Guardian has really rather shot itself in the foot there as the previous 3 month period was the one in which it was encouraging people to stock up because March 29th was going to be the end of the world as we know it. So it is hardly a surprise we are spending a little less now. There was some evidence for this with food sales being down 0.5% in July. If I switch to the subject du jour the humble Cauliflower it would not last from back then but tinned goods would and maybe people used some of them up.

      Maybe we will see a slow down in consumer sales but those who have been predicting it since July 2016 have had egg on their face pretty much every month so far.

  4. Consumers have stopped buying as many ‘big ticket’ items; cars plus property in London and surroundings. More money for gizmos and white goods. But that is already ending as uncertainty rises. Sometimes I think its amazing that people commit to anything anymore. We are preached at every day about the end of the world because we eat the wrong food, drive the wrong cars( any cars), heat and cook with the wrong energy, go on the wrong holidays ( ie fly), invest in the wrong companies, the schools are crap, the police are crap, the lawyers are bent, politicians are ..well you can insert whatever you want there…, the EU is crap/great ( delete as required), the US is the great satan ( if you read the Guardian, except for AOC etc), too many people, too few of the ‘right’ people, drugs won’t work anymore, etc etc.
    Its the end of the world I tell you, unless we follow Goddess Greta of course.

    • Yes the sky is falling……..

      I am old enough to remember the standard of living enjoyed in the 50’s and when I compare it to today I realise we have come a long way; all of us. There have always been doom and gloom mongers however the difference today is that most of them work in the media or have access to the internet to propagate their messages of doom. It rubs off and folk get themselves in a panic about everything. I am definitely a ‘glass half full’ person and believe that the future will be better than the past – in many ways – but not all ways.

      • Agreed Pavaiki, but who is the idiot who downticks on here everytime someone posts not completely in line with ‘regulation’ PC-ness. Forbin has been getting a lot of thse recently. Come on , show yourself, coward, state your objections.

  5. On the subject of this weeks most important theme I can confirm that cauliflowers are on sale for £1 at my local Co-op and available sadly. Pity really I can’t stand the damn things. Onto the minor matter of retail sales as ever it’s fewer people buying more things, if the footfall figures aren’t lying and driven by staycations according to the ONS. There may be trouble ahead (wah wah!) but while there’s music….

  6. While we in the UK are concerned about debt levels and in most the developed economies, some shocking news on personal debt in Russia:

    https://uk.investing.com/news/stock-market-news/relentless-rise-of-consumer-debt-in-russia-fuels-bubble-fears-for-some-1942820

    Half the monthly salaries are servicing debt this must be a shocking level of debt servicing compared to the UK maybe Shaun could have a look at the data, the world economy is not in a good place at the moment and world banks could be in serious trouble once a world recession escalates.

    I do not want to be the bearer of bad news but the financial crisis number 2 could be far worse than the first and with low interest rates continuing to fall worldwide who knows where all this will end up I for one do not.

    • Hi Peter

      I have taken a look at what the Bank of Russia thinks and according to its calculations this began in May 2017 as up until then consumer loans were being repaid in net terms. The bit below is classic central banker speak but if we look through it the annual rate of growth of loans to households has been ~23% in 2019 so far.

      “The slowdown of the annual
      growth rate in retail lending that had emerged in
      May continued into June (Chart 13). In early July,
      the annual growth rate of the retail loan portfolio
      came in at 22.8% (vs 23.3% a month earlier)”

      More than half the growth ( 13% of the 23%) is what we would call consumer credit which says that yes it has lifted off. Also Russia seems to have started a car loans market over this period.

      How has the Bank of Russia responded to this.

      On 26 July 2019, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 7.25% per annum.

      What could go wrong?

  7. Shaun, it seems the big spike in cauliflower prices was due to exceptional heat in July. You can’t really see it yet in the output agricultural price indices, since the most recent month available is June and the July update will only be published on September 19. The monthly price increase for cauliflower in June 2019 was 18.3%, which seems like a lot but was less than the 27.9% increase in June 2018. By the way, the annual average price increase for cauliflowers in 2018 was 27.5% according to the API, based on a weighted average of monthly prices. If one calculated the annual increase based on a simple average as one does in the UK consumer price indices it would be much lower at 17.7%. Cauliflower is not a seasonally disappearing vegetable, like tomatoes, but it is still a very seasonal vegetable or one wouldn’t see this kind of a divergence. The Rothwell formula should be brought back in the UK consumer price indices for fresh fruits and vegetables. It can’t happen too soon.

  8. Shaun, I told you yesterday that the North Macedonia national statistical institute allows for downloading output APIs at a more detailed level than its UK counterpart but I had forgotten about DEFRA’s OpenDocument offering, which is actually more detailed than North Macedonia’s. What North Macedonia provides its users, in Albanian, English or Macedonian, is still pretty impressive though, given it is such a small country.

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