UK: A disappointing start to the year for retail sales – Capital Economics

January’s subdued rise in the official measure of UK retail sales volumes suggests that the real pay squeeze is continuing to take its toll on high-street spending, according to Ruth Gregory, UK Economist at Capital Economics.

Key Quotes

“The monthly 0.1% increase in the volume of retail sales fell short of the consensus expectation of a 0.5% rise and dragged the quarterly growth rate down from 0.5% in December to just 0.1%. As a result, sales would need to rise by around 1% over the next two months in order for it to provide the same support to GDP growth that it did in Q4.”

“However, the ongoing strength in annual nominal retail spending growth, which stood at 4.5% in the three months to January, offers some comfort as it suggests that consumers aren’t tightening their belts in response to higher interest rates or Brexit worries. And if we are right in thinking that inflation will continue to fall back this year – note that the retail sales deflator has already showed signs of dropping, ticking down from 3.1% in December to 2.8% – and wage growth will gradually pick up, consumer spending should receive more fundamental support over the coming quarters. As such, we continue to expect household spending to rise by 1.7% this year and 2% in 2019, up from 1.5% or so in 2017.”