Comment: Optimistic figures put pessimists on back foot

THIS has been a good autumn for the pessimists. But the tide may be turning ahead of the Chancellor’s autumn statement next month.

Signs of a growth slowdown at home, worries over loss of momentum in the global economy and a party conference season dominated by Corbynomics and bellicose rhetoric over continuing austerity all suggested grim times ahead for UK households.

For most of this year the UK economy has again been dependent on the household sector for growth. What prospects, then, for an upturn in consumer confidence against such grim prognostications and chilly headwinds?

But last week brought two notable breaks in the darkening clouds. Latest figures on the public finances saw a fall in the government’s borrowing requirement for September. Public Sector Net Borrowing excluding banks narrowed to £9.4 billion from £11bn a year ago, while July’s performance was revised back to a surplus of £1.8bn against a previous estimate of a £606 million shortfall.  Income tax payments were up 4.1 per cent on the level a year ago and VAT receipts also showed a strong improvement.

Arguably more encouraging were latest data on retail sales. These showed a 1.9 per cent improvement in September following a 0.4 per cent fall in August. This may have been influenced by a 2.3 per cent month-on-month rise in sales of food and drink due to the rugby World Cup – a volatile influence at best and about which, in view of match outcomes in October and the national drowning of sorrows, little more can safely be said.

What of the bigger picture? Analysts at Oxford Economics looked instead at the quarterly data for a better guide to the underlying trend. These showed sales volumes up by 0.9 per cent in the July-September period. “This”, they noted, “was a similar pace to that seen over the first half of the year and suggests that consumers are continuing to enjoy the boost to their spending power from the combination of ‘noflation’ and firming wage growth.

“Given the increasing concerns around the global economy, the enduring strength of domestic demand offers reassurance that GDP growth should remain firm as we move towards the winter.”

This carries rather more significance than a limited shaft of hope for beleaguered high street retailers – particularly in Scotland – who have had to cope with a combination of miserable summer weather and continuing rises in costs such as business rates.

This evident resilience in consumer spending will come as a surprise to many, given the dire political rhetoric of a worsening financial squeeze on households, pressure on wages and the political storm over cuts to the welfare budget. “But the prospects for retail sales and consumer spending”, says Global Insight economist Howard Archer, “look largely bright for the fourth quarter.”

So how can this be? The spending power of millions of households has been boosted by low interest rates, rising employment, earnings growth and zero inflation. Indeed, low fuel and heating costs flowing from the continuing low level of oil prices resulted in consumer prices falling by 0.1 per cent in September. And core inflation – excluding food and energy prices – held steady at just 1 per cent.

At the same time annual earnings growth was running 3 per cent higher in the three months to August, while employment across the UK rose by another 140,000 over the same period to reach a record high of 31.1 million.

As if these influences were not sufficient, the combination of low interest rates and a rising volume of mortgage lending have contributed to a more buoyant housing market, which in turn is also conducive to consumer spending.

Little wonder, perhaps that the CBI distributive trades’ survey showed retailers very upbeat about sales prospects for October. And that could be a key pointer for the strength of consumer demand as we hurtle towards “Black Friday” at the end of November and the onset of the Christmas shopping period.

Why should all this matter for policy? The figures feed into the Chancellor’s autumn statement and spending review due to be unveiled just a month from now on 25 November. Alongside this will be the publication of latest economic forecasts from the Office for Budget Responsibility.

Critical to these forecasts will be the OBR’s assessment of spare capacity. The concern earlier this year was that the UK may soon be facing supply constraints after a sustained period of growth. This was underpinned by the expectation that inflationary pressures would begin to appear and that interest rates would be rising by the end of the year.

But it may very well be that the Office for Budget Responsibility has taken an overly pessimistic view of the economy’s potential. “An economy seeing declining unemployment, record high employment, but falling prices,” says Oxford Economics, “is difficult to characterise as one suffering from supply-side weakness. That has certainly been the impression left by recent data releases… A brighter view of economic capacity in the forthcoming autumn statement forecast seems justified.”

In Scotland, the economic heartbeat, while very close to that of the UK as a whole, has been perceptibly weaker of late, with labour market figures showing a reversal in employment gains earlier this year. And to the continuing cutbacks in North Sea oil investment and employment has been added the threat of closure to steel-making in Scotland.

And it is not all sunny side up for George Osborne. Government borrowing looks on course to hit £77.6bn this financial year, which would be an £8bn overshoot of the target he set in the summer budget.

However, there is a fair chance that because of the latest data pointers, downgrades to growth forecasts may not be as marked as some have feared. That is why the past week has boosted the optimists – a little – and put the pessimists for once on the back foot. «