Here’s a paradox with which businesses across the UK are having to wrestle. The latest figures show better than expected figures on retail sales and that consumer spending is holding up despite higher inflation and the continuing weakness in pay growth.
The latest CBI distributive trades survey for July last week pointed to a sunny start for consumer spending in the third quarter. And retailers appear relatively upbeat about August prospects.
Nor is Scotland missing out. The Scottish Government’s Retail Sales Index last week revealed that the value of Scottish retail sales grew by 1.4 per cent in the second quarter of 2017. That’s above the previous quarter, though slightly below the 1.6 per cent growth seen across Great Britain.
This would seem to indicate that there’s some resilience in the service sector of the economy. But if the latest Bank of England pronouncements are any guide, we are heading for a stormy autumn. Alarm bells have been ringing with warnings on the sharp rise in personal loans.
High street banks, it declared, are “entering a spiral of complacency” (Bank speak for handing out loans willy-nilly) and that the resulting ballooning debt bubble bears a striking resemblance to the one that burst ten years ago this week.
Last week the Bank of England downgraded its forecasts for growth. Its prediction for this year is lowered from 1.9 per cent to 1.7 per cent. And next year’s forecast is shaded down to 1.6 per cent.
Governor Mark Carney warned that uncertainty over Brexit is already weighing heavy. “It’s evident in our discussions across the country with businesses,” he said, “that uncertainties about the eventual relationship are weighing on the decisions of some businesses. Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years.”
All this comes as the Monetary Policy Committee (MPC) left interest rates unchanged at their record low of 0.25 per cent. Six policymakers concluded that the UK economy is too sluggish to handle higher borrowing costs.
And as if all this was not enough gloom, the Bank’s deputy governor Ben Broadbent predicts that UK interest rates may have to go up by more than the market expects. The MPC, he added, believed there would need to be more rate rises than the market as whole did. That’s a strange view given the sluggish growth of the economy in the second quarter with GDP up by a paltry 0.3 per cent, and the Governor’s warnings on pay rises.
It’s not the only instance where business surveys are at odds with official data. These readings of business opinion are strongly influenced by daily news flow and commentary – gloomy of late – and can be volatile. So what is the basis for the relatively upbeat reading in that CBI survey?
The 111 firms who responded to the survey, between June 28 and July 14, are responsible for a third of employment in retailing. The survey showed that the volume of sales grew at a healthy pace – driven by grocery and clothing sales in particular – while orders placed on suppliers rose solidly for a second consecutive month. Overall, sales for the time of year were considered to be slightly above seasonal norms. Among the key findings were:
A total of 48 per cent of retailers said that sales volumes were up in July on a year ago, whilst 26 per cent said they were down, giving a balance of plus 22 per cent.
Forty per cent of respondents expect sales volumes to increase next month, with 20 per cent expecting a decrease, giving a balance of plus 20 per cent.
Thirty-two per cent of retailers placed more orders with suppliers than they did a year ago, whilst 22 per cent placed fewer orders, giving a balance of plus 10 per cent.
Twenty-three per cent of retailers reported that their volume of sales for the time of year were good, whilst 17 per cent said they were poor, giving a balance of plus six per cent.
Growth in internet sales was little changed from last month in the year to July, and marginally below the long-run average. Elsewhere in the distribution sector, wholesalers continued to report above-average growth in sales volumes, but motor traders reported the fastest drop in sales since November 2013.
Anna Leach, CBI head of economic intelligence, says: “The warm summer has added a sizzle to our high streets as shoppers defied expectations, with sales growth in clothing shops and grocers driving overall performance.” (The west of Scotland might take exception to talk of the warm summer adding a sizzle: this year’s miserable summer is more likely to have sent consumers scuttling for rainwear.)
However, Leach adds: “While retailers expect a similar pace of growth next month, the factors underpinning their sales growth are more shaky. Although employment is strong, real incomes are falling in the wake of higher inflation, and that’s expected to feed slower consumer spending growth ahead.”
Howard Archer, chief economic adviser to the EY Item Club, is notably downbeat about retail prospects. “The outlook for consumers looks set to be highly challenging over the rest of the year,” he writes.
“Real income growth is currently negative, and it looks highly likely to remain so through the second half.” He refers to Office for National Statistics data showing total real average weekly earnings shrank 0.7 per cent in the three months to May, the sharpest drop since mid-2014. Inflation looks likely to be close to three per cent through the second half of 2017, while earnings growth seems set to remain pretty close to two per cent.
“Furthermore,” he adds, “consumer confidence is brittle with caution over making major purchases fuelled by heightened economic, political and Brexit uncertainties.
“There is some support for consumer spending coming from current solid employment growth, but it is questionable if this can continue in the face of weakened UK economic activity, appreciable business uncertainty and concerns over the UK’s economic and political outlook.”
Developments this autumn are set to have a critical bearing on business and consumer confidence. And while retail sales have held up for now, that confidence looks brittle.