UK consumers leap out of their supposed grave yet again

Today we advance on the UK Retail Sales data which has various factors at play. Firstly the general theme is one of a fading of the growth we saw in 2016 as the growth in real wages also fades. On the subject of real wages I note that Sky News last night was comparing growth in March regular pay ( 2.1%) with April CPI inflation (2.7%) to presumably reinforce its point although of course there is a clear flaw there. Actually in March total pay growth (2.4%) was slightly higher than inflation ( 2.3%) as I pointed out yesterday but for some reason our official statistician’s use regular pay for real wages. I do wonder if they think Pound’s earned as bonuses are somehow marked in people’s pockets and bank accounts and treated differently.

Secondly there is the influence of the timing of Easter which was later this year and whether the seasonal adjustment allowed for that properly. The Confederation of British Industry or CBI certainly thinks that growth picked up.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)……37% of respondents expect sales volumes to increase next month, with 21% expecting a decrease, giving a balance of +16%

Indeed there was something rather familiar from last year so if it is the same let me say thank you ladies one more time. Your devotion to this area of the economy is hugely impressive.

Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%).

The details of this particular survey are as follows.

The survey of 112 firms, of which 57 were retailers, showed that the volume of sales grew at the fastest pace since September 2015 in the year to April, with orders placed on suppliers rising at the strongest rate for a year-and-a-half.

Today’s data

It would appear that my argument about problems with the seasonal adjustment concerning Easter gets another tick in its box.

In April 2017, the quantity bought in the retail industry increased by 2.3% compared with March 2017 and by 4.0% compared with April 2016.

This was a strong monthly performance and even got a little support in a way from my argument about the effect of inflation.

Average prices slowed slightly in April 2017, falling from 3.3% in March to 3.1% in April.

Slightly lower prices helping the performance? Maybe a bit and I also note that the measure of inflation in the retail sector seems to provide more backing for RPI data than CPI or CPIH.

If we look into the detail we see that they have a completely different view to the CBI.

Compared with March 2017, April 2017 has shown increases in the quantity bought and amount spent across all store types except department stores and textile, clothing and footwear stores.

I am not sure how a 97% rise for the CBI goes with an official data fall but there you have it! Meanwhile the march towards consuming online continues.

average weekly spending online was £1.0 billion; an increase of 19% compared with April 2016…….the amount spent online accounted for 15.6% of all retail spending, excluding automotive fuel, compared with 14% in April 2016.

Taking a perspective

If we look back we see that the figures for March which were so troubling at the time were revised from monthly growth of 1.7% to 2%. So they were not quite as bad, however even this month’s better performance is not so impressive on a quarterly basis.

The underlying pattern, as measured by the 3 month on 3 month estimate, showed a slight increase in April 2017 following a short period of contraction, increasing by 0.3%.

Thus it would be realistic to say that the surge of 2016 has gone and we are in a period  of little or marginal growth.

Looking Ahead

One area that is not going to be boosting Retail Sales is the buy to let industry if yesterday’s data from the Council of Mortgage Lenders is any guide.

Gross buy-to-let saw quarter-on-quarter decreases, down 2% by value and 1% by volume. Compared to the first quarter 2016, the number of loans decreased 39% and the amount borrowed decreased by 40%.

Of course that is comparing to the pre Stamp Duty increase peak but even the CML does not look especially optimistic.

The number of loans for buy-to-let house purchase advanced in March remained low compared to activity seen before the change on stamp duty on second properties introduced in April last year.

Also more general housing activity seems to have faded somewhat.

On a quarterly basis, house purchase activity was at its weakest for two years since the first quarter of 2015.

Although ever cheaper mortgage interest-rates did have an impact on existing borrowers.

By contrast, the number of remortgage loans advanced to borrowers was at its highest since the first quarter of 2009.

The only growth was seen in first time buyers which I have to say is not easy to explain.

Moving onto other factors I note that Markit’s latest survey has a two-way pull.

Higher living costs resulted in one of the sharpest falls in cash available to spend for two-and-a-half years in May. Survey respondents also indicated that their need for extra unsecured borrowing continued to rebound from the lows seen in 2016.

Of course regular readers of my work will realise that the UK has been on a bit of an unsecured borrowing binge recently. So perhaps more of the same is on its way. Somewhat oddly the surge in unsecured borrowing seems to have passed Markit’s economists by.

The survey measure which tracks people’s need to take on additional unsecured borrowing has rebounded so far this year, which marks an end to the steadily improved trend seen since late-2011

For newer readers the growth in UK unsecured credit has been of the order of 10% per annum for around a year now according to the Bank of England.

Car Finance

This seems to be continuing its rise and rise.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 13% by value and 5% by volume in March, compared with the same month in 2016. In Q1 2017, new business was up 10% by value and 3% by volume, compared with the same quarter in 2016.

Whilst we do not know that the cars bought were the same as last year there is a clear hint of higher inflation there than in the official figures if we look at the gap between value and volume. Also the word “bought” needs some review as these days we essentially lease or rent them.

The percentage of private new car sales financed by FLA members through the POS was 86.5% in the twelve months to March, unchanged compared with the same period to February.

The demand does however suggest that Gary Numan may have been prescient all those years ago.

Here in my car
I feel safest of all
I can lock all my doors
It’s the only way to live
In cars

Comment

Economics is a very contrary science if it is a science at all. We should welcome today’s better numbers for the UK and indeed they go with the business surveys which suggested an economic pick-up in April. Let us hope that continues. However we see yet more problems for our official statisticians as the seasonal adjustment for the timing of Easter misfires yet again. I am afraid that blaming that old staple the weather simply does not cut it. From the BBC.

Warmer weather helped retail sales to rise by more than expected last month, according to official data.

The actual picture is complex as growth fades and frankly after last year’s surge it had to at some point. The rise in inflation has reduced real wage growth although the situation is as ever in flux as in response to today’s numbers the UK Pound £ has pushed above US $1.30 which would help trim future inflation rises if we stay there. The ying to the upbeat yang is however that as so often in the past we look like we are borrowing on tick to spend.

If we move to financial markets this week has taught us one more time that crowded trades are the worst place to be as @NicTrades reminds us.

Reuters said this week biggest trade in the world was shorting VIX via leveraged ETFs millions selling vol at 7.8% VIX is now 16%

ETF stands for Exchange Traded fund.

 

 

 

 

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Does anybody believe the Bank of England hints of an interest-rate rise?

Firstly let me open with my best wishes to those caught up in the terrible event at Westminster yesterday which is somewhere I pass through regularly. Let us then review some better economic news in a period where the UK statisticians overload particular days. If we go back to Tuesday where there was a panoply of inflation data there was also this about the public finances.

Public sector net borrowing (excluding public sector banks) decreased by £2.8 billion to £1.8 billion in February 2017, compared with February 2016; this is the lowest February borrowing since 2007.

I recall that the January numbers were also more positive and this led to this.

In January and February 2017, the government received £13.4 billion and £4.7 billion respectively in self-assessed Income Tax, giving a combined total of £18.1 billion. These represent the highest combined self-assessed Income Tax receipts on record (records begin in 1998).

So good news and other forms of revenue were good too.

Similarly, in January and February 2017, the government received £6.2 billion and £2.2 billion respectively in Capital Gains Tax, giving a combined total of £8.4 billion. These represent the highest combined Capital Gains Tax receipts on record (records begin in 1998).

It would seem that Capital Gains Tax is more significant than might be assumed. I guess the higher house prices ( it is paid on second homes and therefore buy to lets) and maybe profits from the equity market are driving this. I am surprised that the Bank of England has not been trumpeting this as part of its wealth effects, have they missed it?

Also the overall tax situation for the financial year so far has been strong.

In the current financial year-to-date, central government received £616.1 billion in income; including £465.6 billion in taxes. This was around 6% more than in the previous financial year-to-date.

There was a change to National Insurance rates but even allowing for that we are seeing a pretty good performance and ironically after the talk of extra spending and fiscal expansionism the numbers may well be telling a different story.

Over the same period, central government spent £638.1 billion; around 2% more than in the previous financial year-to-date.

With inflation rising that is of course less in real terms than it first appears and meant that we did better here.

Public sector net borrowing (excluding public sector banks) decreased by £19.9 billion to £47.8 billion in the current financial year-to-date (April 2016 to February 2017), compared with the same period in the previous financial year;

Retail Sales

There was good news as well in the February data for Retail Sales.

Estimates of the quantity bought in retail sales increased by 3.7% compared with February 2016 and increased by 1.4% compared with January 2017; this monthly growth is seen across all store types.

However the monthly numbers are erratic and the seasonal adjustment is unconvincing. February was partly so good because January was revised even lower. But the year on year comparison was strong.

In February 2017 compared with February 2016, all main retail sectors, except petrol stations saw an increase in the quantity bought (volume) while all sectors saw an increase in the amount spent (value). The largest contribution in both the quantity bought and amount spent came from non-store retailing.

However because of the week December and January data the trend remains for a fading of the year on year growth.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 1.4% for the second month in a row; the largest decrease since March 2010 and only the second fall since December 2013.

Actually we get a confirmation of some of the themes of this blog. For a start in something which central bankers and inflationistas will overlook higher inflation leads to lower consumption. The higher oil price has led to less petrol consumption.

the largest contribution came from petrol stations, where year-on-year average prices rose by 18.7%……..The underlying trend suggests that rising petrol prices in particular have had a negative effect on the overall quantity of goods bought over the last three months.

Over time I expect this to feed into retail sales as you see that prices are rising overall as the higher oil price feeds through.

Average store prices (including fuel) increased by 2.8% on the year, the largest growth since March 2012;

So sadly I expect the retail sales growth to fade away as higher inflation erodes real wages.  Also whilst it is only one sector we have yet another inflation measure (2.8% here) running higher than the official one, how many do we need?

Royal Statistical Society

I am pleased that it has expressed its misgivings about the new UK inflation infrastructure in a letter to The Times today. Here are the main points.

For several years, the Royal Statistical Society (RSS) has been advocating the introduction of a proper household inflation index. We believe the answer lies in the proposed Household Costs Index (HCI) that is currently being developed by the Office for National Statistics, with expert input from some RSS members.
Paul Johnson is right that government should not be cynical in its use of different inflation measures. We would also argue, however, that the government should use the appropriate inflation index for the job at hand. CPIH makes sense as an index for economic policy matters (such as potentially interest rate setting by the Bank of England) but it is HCI that, once fully developed and proven, should be used for uprating purposes and for assessing real incomes in the UK.

Good for them! I have spent quite some time taking my arguments to the RSS and am pleased that the message is at least partly not only being received but also transmitted. My only quibble would be that CPIH results from national accounts methodology and not economic principles.

Ben Broadbent

Ben spoke at Imperial College earlier and as ever his Forward Guidance radar misfired.

We may already be seeing the impact of that squeeze on retail spending, which in real terms fell quite sharply around the turn of the year.

Some felt it was a hint for the 9:30 numbers but if it was Ben had misread them. He gives some more Forward Guidance by telling us the UK Pound £ may go up or down!

Either the currency market is too pessimistic, in which case sterling’s depreciation is likely to be reversed over time. Or it’s not, in which case the costs of exporting will eventually go up.

Actually after the last Forward Guidance debacle Ben has either completely lost the plot or has developed a sense of humour as whilst not in the speech this was being widely reported..

It’s quite possible we could see rates go up in the UK

Can see scenarios where BOE could raise rates ( h/t FXStreet )

Another issue is that Ben Broadbent seems to follow financial markets and assume they are correct. If you recall when I was on BBC Radio 4’s MoneyBox last September the ex-Bank of England economist Tony Yates repeated the same mantra. They seem to have forgotten that they should not be puppets they should have their own views.

Comment

This week has had a ying and yang to it on UK economic news. The public finance and retail sales numbers remain good but the Sword of Damocles already beginning to swing is higher inflation especially via its effect on real wages. This will affect retail sales as 2017 progresses and that will affect the public finances too albeit there are also gains for the latter. Yet the establishment continues with its objective of inflation measures that ignore as much inflation as possible. Does anybody actually believe this new Forward Guidance from the Bank of England? After all back in 2011 they ignored inflation which went above 5% with disastrous consequences for real wages.

Me on Official Tip-TV

http://tiptv.co.uk/uk-inflation-property-bubble-boe-response-not-yes-man-economics/