UK Retail Sales are strong again posing questions for the CBI and BRC

We find ourselves advancing today on what is the strengths of the UK economy which is retail sales. These have consistently supported economic output and GDP ( Gross Domestic Product). However there is an undercut to this as our propensity to consume is a major factor in our persistent balance of trade deficits. It is also one of the factors that gets forgotten when this tune starts up and people get the vapors because it is an area where we are different.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

British Retail Consortium

This has played a rather different tune to the official data as these excerpts from its prices report show.

Shop prices fell by 0.6% on the previous year as low consumer demand and stiff competition continued to push down prices…….While consumers may welcome lower prices, falling consumer demand is squeezing retailers’ already tight margins.

Their volume data has been weak for some time.

Unsurprisingly September proved to be another difficult month for retailers, with like-for-like sales declining by 1.7 per cent compared to last year. Worryingly, even online sales moved closer to stalling, with growth of non-food online sales only 0.7 per cent.

“Ongoing Brexit uncertainty is clearly having a material impact on the consumer psyche, with all but one non-food category being in decline in September. Consumers are choosing to focus on the essentials, with food one of the few categories delivering growth.

The trouble is that they have ended up looking like they have experienced a set of bum notes as the official data has turned out to be pretty good. Indeed frankly there has been no relation between the two at all.

The CBI

The Confederation of British Industry has been sending out an SOS for some time now.

Retail sales volumes in the year to September fell for the fifth consecutive month, albeit at a slower pace than the previous month, according to the latest CBI Distributive Trades Survey. Retailers expect the contraction in sales volumes to ease further in October.

There is a particular subject they seem obsessed with.

Five successive months of falling volumes tells its own story about the tough conditions retailers are having to operate in. Add to this the pressures of Sterling depreciation and the need to plan for potential tariffs and supply issues in the event of a no-deal Brexit and you get a gloomy picture for the sector.

The media have often joined in with this gloomy view but have regularly found themselves crossing their fingers that their readers,listeners and viewers have forgotten this when the official data is released. I fear that the British Retail Consortium and the CBI are imposing their own views on a particular issue onto the data rather than just letting the numbers speak for themselves.

Today’s Data

At first it might appear odd that this was a good number.

The quantity bought was flat (0.0%) in September 2019 when compared with the previous month, following a fall of 0.3% in August 2019.

There is the improvement from last month’s fall but there is also the fact that September last year was a particularly weak number where the index fell from 106.2 to 105.4 so if we switch to an annual comparison we see a strengthening of the position.

The year-on-year growth rate shows that the quantity bought in September 2019 increased by 3.1%, with growth across all sectors except department stores and household goods.

If we look at the picture we see that pretty much everywhere is strong but particularly non-retail and food.

In September 2019, all four main sectors contributed positively to the amount spent and quantity bought, resulting in a year-on-year growth of 3.4 and 3.1 percentage points respectively.

Non-store retailing provided the largest contribution to the growth in the quantity bought at 1.4 percentage points. Food stores reported the largest contribution to the amount spent at 1.5 percentage points in September 2019.

The Recent Trend

There have always been issues with monthly retail sales data being erratic and the modern era with the development of Black Friday and Amazon sales days have made that worse. Thus we get the best idea from the three month average.

In the three months to September 2019, moderate growth in the quantity bought continued at 0.6% when compared with the previous three months, with all sectors within non-food stores reporting declines except “other stores”.

That may be moderate growth for retail sales but we would be happy indeed if all the other areas of the economy managed it! As to the detail we are told this.

Non-store retailing showed strong growth at 4.3%; this includes a strong monthly growth in July 2019 of 6.9% with summer promotions boosting sales more than usual in this month. Food stores also reported a growth in the three-month on three-month movement; this follows three previous months of decline in the three-month on three-month growth rate.

I am afraid that one sector seems locked into decline though.

Department stores continued the ongoing decline in the three-month on three-month movement resulting in 13 consecutive months of no growth in this sector.

Online Sales

These continue to strengthen overall.

Internet sales increased by 9.1% for the amount spent in September 2019 when compared with September 2018, with all sectors reporting growths except department stores.

However the monthly numbers like elsewhere are erratic.

In contrast, internet sales fell on the month by 2.0% when compared with August 2019.

It seems that department stores cannot buy a break as I note that their online sales over the past year have fallen by 3.6%

Comment

We are seeing yet more confirmation of the theme that I established on the 29th of January 2015.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

Actually we have shifted from absolute price falls to relative ones as inflation in this area which has been around 0.3% is far lower than wage growth, So we have real wage growth of over 3% which is boosting retail sales. Ironically the British Retail Consortium think this impact may be even stronger.

September Shop Prices fell by 0.6% compared to a 0.4% decrease in August. This is the highest rate of decline since May 2018…..Non-Food prices fell by 1.7% in September compared to August’s decrease of 1.5%. It is the highest rate of decline since May 2018.

So according to their numbers relative real wages are surging but as to the consequences well Kim Syms got it right I think.

Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing.

As to the wider issue these numbers move the UK further away from a recession as they suggest a small ( 0.03%) boost on a quarterly basis and a stronger annual one.

Meanwhile in other news Bank of England Governor Mark Carney has flown all the way to Boston in the United States to lecture us all on climate change.

Asked about his views on climate change and potential divestments from fossil fuel firms, Carney said a more effective approach would be to help companies, including automakers and energy producers, move to lower emissions.

“It’s not just about divestment,” he said. Better, he said, would be “to put capital into an energy company, that’s going from oil-and-coal heavy to a renewable mix, that they wouldn’t otherwise do if they didn’t get the capital.” ( Reuters)

He did however find time to remind us that his priority remains The Precious! The Precious!

Carney said the British central bank would probably cut the countercyclical capital buffer that it sets for banks to zero, from 1% now, if the economy – which faces the prospect of a no-deal Brexit shock – took a hit.

The Investing Channel

 

 

The UK consumer continues to both shop and buy

This morning has opened with a reminder that the UK is progressing towards electronic forms of payment. From the BBC.

Consumers spent more money on credit cards with UK retailers last year than they did in cash, a retailers’ trade body has said.

Debit cards were the most popular, but falling cash use pushed notes and coins down to third place, the British Retail Consortium (BRC) said.

Cash accounted for just over £1 in every £5 spent with UK shops.

The exact details of the numbers can be found here.

Credit and charge cards accounted for £82bn, or 22%, of retail sales last year – outstripping cash (£78bn) for the first time, according to the BRC, which has been running its payments survey for 20 years. Spending on debit cards totalled £216bn.

So the real story is the way that debit cards have come to dominate spending. In a sense they have become another form of cash and more convenient in that you do not have to go to a cash point and take money out before spending. I checked the research and they have grown from 49.6% of of transactions in 2013 to 56.8% in 2018. For foreign readers they ( and credit cards) are very convenient as you can “tap and go” in the UK for purchases up to £30. I do see people paying with cash but I see it less and less.

Returning to the growth argument the BBC seems to have omitted the bit which reminded us how strong UK retail sales have been.

Total UK retail sales rose by 4.1% to £381 billion, from £366 billion the previous year.

The BRC research was in essence driven by a whinge about this.

Retailers spent £1.3 billion just to accept payments from customers

I can see their point although inexplicably they seem to have omitted the costs of taking more cash in terms of security and the like.

Today’s Data

I had been thinking that we were due a weaker number based on reverse logic. You see these are erratic numbers and the outlook with the real wage growth we have is good, so a reverse ferret could be in play. At first it did look like that.

The monthly growth rate in the quantity bought in August 2019 fell by 0.2%; non-store retailing was the largest contributor to this fall, partially offsetting the strong growth reported last month for this sector.

However things are not quite how they seem because the July numbers which were originally reported as 108.8 have been revised higher to 109.3. So compared to where we thought we were August’s numbers were higher at 109. So good news on the index level gives a poor month on month number.

If we look deeper we see that overall growth has been continuing.

In the three months to August 2019, moderate growth in the quantity bought continues at 0.6% when compared with the previous three months, with growth in non-store retailing being the main contributor to the increase.

As it happens this fits well with the annual comparison.

The year-on-year growth rate shows that the quantity bought in August 2019 increased by 2.7%; this is a slowdown compared to the stronger growth experienced earlier in the year which peaked at 6.7% in March 2019.

We get a further perspective here as we note that growth has slowed from the March peak. Actually it had to slow from that sort of growth rate as even the UK consumers lust for spending is not infinite. Also March will have been boosted by some pre expected Brexit day stocking up.

Low Inflation

I have argued since the 29th of September 2015 that low inflation boosts retail sales via its impact on real wages. From today’s data that looks to be still in play because if you look at the difference between amount spent and volume you have a hint of the inflation rate.

In the three months to August 2019, the amount spent increased by 1.1% and the quantity bought increased by 0.6% when compared with the previous three months.

When compared with a year earlier, both the amount spent and quantity bought showed strong growth of 3.4% and 2.7% respectively in August 2019; this growth is a slowdown to the strength experienced earlier in the year.

Online Sales

There was an unusual development which I suspect is a fluke but will monitor.

Online sales as a proportion of all retailing fell to 19.7% in August 2019, from the 19.9% reported in July 2019.

That is especially curious as the BRC reported this for the same period.

Footfall declined by 1.3% in August, compared to the same point last year when it declined by 1.6%……..On a three-month basis, footfall decreased by 2.1%. The six and twelve–month average declines are 1.4% and 1.7% respectively.

As you can see they have consistently reported declines and in terms of the official data have been consistently wrong which up until this month can be explained by the decline of the high street and the rise of online shopping.

The CBI

I am not sure what they have been smoking to have reported this.

The CBI said that while retail sales volumes and orders both fell at their fastest since December 2008 in the year to August, sales were only slightly below average for the time of year, and to the least extent in four months.

As you can see that sentence seems to collapse under its own contradictions. Furthermore it was for a slightly earlier period that we have been looking at today and we know that was revised up. Anyway they expect the future to be dreadful and from where they think we are starting then it will be even worse than dreadful.

The CBI’s latest Distributive Trades Survey – which provides a gauge of retailers or the difference between those reporting rising and falling sales volumes – slumped to -49 in August from -16 in July.

Along with marking the biggest pace in a drop since the 2008 financial crisis, it was the second weakest reading since records began in 1983.

Comment

If we look back the story has been one of sustained growth because today’s release only takes us back to 2013 but if we go back 6 years to August 2013 we see an index level of 89 compared to this August’s 109. So we have seen growth of 22% in total. This has been quite a support for the UK economy but it does have a bit of a hangover because our trade figures so bear the brunt of this. Here they are for the three months to July.

Excluding unspecified goods (including non-monetary gold) the total trade deficit narrowed by £3.7 billion to £4.7 billion, exports fell £2.5 billion to £159.0 billion and imports fell £6.2 billion to £163.8 billion in the three months to July 2019.

They are an off set affected I think by the expected March Brexit date in addition to the usual problems. But the fundamental point is that we have run yet another deficit. For newer readers I feel that the situation is not as bad as it looks because we have so little detail on services trade but that is far from saying it would solve the problem.

However in conclusion the overall stream on UK data has been pretty good in the circumstances. Or as the Rolling Stones put it.

You can’t always get what you want
But if you try sometimes, well, you might find
You get what you need.

The Investing Channel

 

 

How will the current financial market turmoil affect the UK economy?

At the moment all eyes are on China as it faces yet more stock market turmoil. My subject of Friday looked into the chaos theory view of the impact of a butterfly fluttering its wings and this morning they have certainly fluttered with the Shanghai Composite falling some 8.7% to 3211. Markets across the Pacific too fell and the Abenomics policy of Japan will not be pleased to see the Nikkei 225 equity index falling 895 points to 18540 as part of it is based on the wealth effects of higher equity prices. Also of course the Bank of Japan has been buying Japanese shares via ETFs (Exchange Traded Funds). My theme of today is to look at the impact on the UK and to have as a sub-plot the impact of falling equity markets on economies and in this case sharply falling ones. This is of course the reverse of modern central banking theory as it is an antithesis of QE (Quantitative Easing) policies being deployed by many central banks around the world which are relying on higher asset prices.

Up Up and Away

Whilst it is in some ways reassuring to be reminded that in Star Wars terms there is indeed a place which is “far,far,away” maybe the UK CBI (Confederation of British Industry) shouldn’t be living there!

The UK’s leading business group is forecasting 2.6% GDP growth for 2015, up from 2.4% in June, and 2.8% in 2016, up from 2.5%.

An interesting time to release that you might reasonably think and also there is the issue of them feeling they can forecast the UK GDP to an accuracy of 0.1%. If only! But let us examine what underlies their positive view of the UK economy.

The upgrade is due to a combination of factors, including signs of recovering productivity in the first half of this year feeding through to stronger wage growth. Combined with continued low inflation from falling commodity prices, this gives a welcome boost to household spending.

Okay so far so reasonable what else?

Furthermore, business investment is also likely to remain healthy, with our surveys indicating robust plans for capital spending.

At this point Goldilocks porridge is looking “just right” as consumption and investment expand together although to be perfect we would hope for more exports.

net trade looks set to drag on GDP growth in both 2015 and 2016.

The underlying message here should be played with the Outhere Brothers on the CBI tannoy.

I say, boom boom boom now let me hear you say wayoh
(Wayoh)

Or to be more specific.

As a result, we expect decent quarterly GDP growth ahead: we anticipate growth to average 0.7% a quarter until the end of 2016, in line with the expansion seen in Q2 2015.

So we move on from a universe where all is happy and bright and rather than continually promising to raise interest-rates the Bank of England has already done so!

UK Retail Sales

Last week’s data reminded us of this.

Year-on-year estimates of the quantity bought in the retail industry grew for the 28th consecutive month in July 2015, increasing by 4.2% compared with July 2014.

And also the reason why it has happened.

Average store prices (including petrol stations) fell by 3.0% in July 2015 compared with July 2014; the 13th consecutive month of year-on-year price falls. All store types except textile, clothing and footwear stores reported decreases.

So the growth is being driven by lower prices and backs up the CBI argument above. Indeed with the price of a barrel of Brent Crude Oil falling towards US $44 this morning we can expect more of it should it remain at such levels. Regular readers will be aware that I was making this point when the headlines were screaming “deflation” as a bad thing. From January 29th.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

UK House Prices

If we think of one UK asset price falling then minds naturally turn to wonder what UK house prices will do next. A troubling view which brings many themes of this blog together has been suggested by the Financial Times today.

Companies that bought properties after the credit crunch that ended in 2009 have cashed in £3.4bn of London property — pocketing £870m in profits — in the past two years, according to analysis by property advisers Cushman & Wakefield.

Also the numbers show an extraordinary volume level.

Total investment volumes in the central London market hit a record £24.6bn last year, Cushman & Wakefield’s figures show — topping previous record deal volumes in 2013.

So we are left wondering if the smart money has now been and gone to some extent and also if the newer investors or ones with short time spans meaning that the situation just got more precarious. That is an issue in itself but is also one which may topple over into a least part of the residential housing market.

Nine Elms, is seeing a wave of “flat-flipping” as investors try to sell unbuilt properties amid fears the capital faces a glut of expensive homes.

Oh dear so much for the property boom just up the road from me! I do hope we still get the Tube link it has been promised for the 20 years I have lived there. I also note a comment which provides some perspective from an FT article from 6 months ago.

“About 54,000 homes are either planned or already under construction in the priciest areas of the capital…”

“Most of these homes will be priced at close to or above £1m. However, just 3,900 homes worth more than £1m were sold in these areas in 2014…”

So if the current turmoil continues it will not be only equity prices which are falling in London. Can a bubble burst safely?

Currency Wars

Much is happening here as we see some currencies devalue and depreciate as others rise. I note that Canadian investors have been buying London commercial property and for them the rise of the UK Pound £ versus the Loonie will be welcome and last week there was the devaluation from Kazakhstan added to today by the UK Pound now buying 109 Roubles.

However on the other side of the coin the Euro has strengthened again in a move one might not have expected in the midst of the ECB’s continuing QE program. At nearly 1.15 versus the US Dollar it has pushed us below 1.37.

Comment

Back in July 2012 the Bank of England told us this.

In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

Which in its view contributed to this.

it is important to remember that without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. More companies would have gone out of business.

They estimated that the wealth gain could have been £600 billion or £10,000 each if distributed evenly. Of course the distribution is far from even as the concept of the 0.1% demonstrates. The Bank of England then somewhat contradicted its hype by started the Funding for Lending Scheme to subsidise banks via pumping up house prices as a result of lower mortgage rates.

So we see that the Bank of England was not as convinced of the beneficial wealth effects from a rising equity market as it claimed as otherwise it would not have started FLS. With the FTSE 100 at 6050 some of the beneficial effects have gone and that is before we consider what may have happened to margin traders on the drop. Also there is the fact that falls like this have a different impact to a sustained rise as China is about to find out.

However the real driver for the UK economy in an asset price sense is the housing market and house prices. If we move from what the Bank of England says to what it did (FLS) we know that it agrees. So if the UK economy is to be affected we need not only to look at other economies such as China but also keep a close eye on the property market.