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UK Retail Spending Holds Up For Now While Public Finances Continue to Deteriorate |
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20.11.08 13:03 |
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UK Retail Spending Holds Up For Now While Public Finances Continue to Deteriorate
Official data on UK retail sales continues to throw up surprises. Last month, the ONS recorded that spending on the High Street edged down only 0.1%.This was despite market expectations for a much larger 0.9% mom slump after a wide variety of economic indicators fell sharply last month amid a virtual collapse of the global financial system and a growing realisation that real economies around the globe were heading for recession.
Survey data on the UK household sector has been decidedly bearish for some time now. Consumer sentiment as measured by the GfK is languishing at 30 year lows while the CBI survey on the retail sector is not far from 25 year lows. In addition, the BRC survey on the High Street has now fallen to 3 year lows, with like-for-like sales contracting 2.2% yoy in October.
Official data on retail spending last month still made for unpleasant reading. The overall figure was held up by a reasonably robust 1.0% mom rise in spending on food. The non-food component---which more closely matches households' discretionary purchases---declined a hefty 1.1% mom in October, in line with analysts’ expectations for overall High Street spending in October.
Other supports to spending last month came from a 0.9% mom gain in "non-store" or internet/mail order spending as well as a rise of 1.2% mom in "other stores". Offsetting this was a 1.0% mom decline in department store sales with clothing & footwear spending down 1.5% mom. Household goods plunged 3.4% mom in October as the evaporation of housing market activity and a general reluctance to make big ticket purchases took its toll.
On balance, the modest trend decline in High Street spending remained unchanged in early 4Q despite a wide array of indicators suggesting that the contraction in 4Q GDP is set to be larger than the 0.5% qoq decline in 3Q. The October level of retail sales, for instance, is only 0.1% below 3Q which in turn fell 0.1% relative to 2Q. The retail sales deflator decelerated further to 0.6% yoy in October from 1.0%, suggesting once again that aggressive discounting is helping to limit the declines in volumes.
The MPC has in the past questioned the relative buoyancy of retail spending data compared to much more downbeat survey evidence, including those from their own Bank Agents. We still expect a significant slowdown in spending in coming months as unemployment continues to rise sharply. Next year, overall consumer spending is likely to contract 1.4%, in our view.
With CPI inflation falling much faster than expected in October to 4.5% combined with a spate of announcements concerning significant headcount reductions by major financial, corporate and business organisations in recent weeks, we believe the MPC is likely to undertake another deep 100bp cut in interest rates to 2.0% at the December 3-4th MPC meeting. BoE Governor King last week promised to take the Bank Rate to "whatever level necessary" to combat deflationary pressures in the economy. We expect the Bank rate to fall to at least 1.5% early next year with a rising chance of a 1.0% level instead.
Separately, there was further evidence of an alarming deterioration in the fiscal outlook. Public sector net borrowing (PSNB) recorded a larger than expected deficit of £1.4bn in October (consensus: £0.4bn). This is the first recorded deficit in October since 1994. Cumulative borrowing so far this year has come in at £37bn compared to just £20bn this time last year. This also compares to the HMT 2008/09 forecast of £43bn made back in March ---with 5 months of the financial year still to go. We are looking for PSNB to rise to £67bn this financial year and even higher still in 2009/10 to just under £100bn.
In next week's Pre-Budget Report on November 24th, the Chancellor is likely to rip up his projections for economic growth and borrowing, in our view. Press reports suggest Darling will present a scenario of a short, sharp recession with the economy contracting around 1.3% next year but bouncing back by about 1.7% in 2010 and 3.0% in 2011. While our forecasts in 2009 and 2010 are not too dissimilar, we believe that the recovery in later years will be far more muted. It is unlikely that the UK economy will be able to achieve growth anywhere close to the 3% of recent years in the absence of robust financial services growth, a surging house market and easy credit, in our view. More likely, the UK will even struggle to reach the 2.5% average over the past 50 years as the economy rebalances away from leveraged household and public spending towards a greater weighting of exported goods and services under a weaker sterling exchange rate. We expect growth of only 1.6% in 2010. A more muted than expected economic recovery in 2010 would make it difficult for the government to show a sharp reduction in borrowing in that and subsequent years, in our view (for more details see our Economic Brief: Pre-Budget Report Preview: Spending Out of a Slump?, published yesterday).
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