UK retail sales hold firm, but real income squeeze will hurt - ING

James Knightley, Senior Economist at ING, notes that the UK retail sales were flat on the month, but slowing employment growth and rising inflation will weaken consumer spending next year.

Key Quotes

“UK retail sales were flat in September versus the +0.2%MoM consensus. However, August’s growth rate was revised up two-tenths of a percentage point so in the end the outcome is broadly in line with expectations.

The details show that clothing sales were poor for the second month in a row (-2.8% MoM after a 3% fall in August). The story was mixed elsewhere with household goods seeing sales rise 3.7% while non-specialised stores saw sales rise 0.1% and food stores saw sales fall 0.2%.

Nonetheless the story on total retail sales remains reasonably good with annual sales growth 4% despite fears that the Brexit vote could have led to a collapse in confidence and sales. It is likely that better weather and a strong performance in the Olympics and Paralympics lifted the national mood while a smooth political transition and early stimulus from the Bank of England also helped. The collapse in sterling has also helped boost sales to foreign tourists who see their euros, yen, dollars and renminbi go further in British shops.

However, with inflation starting to respond to higher import costs relating to sterling’s weakness we are going to see household spending power being eroded. We also suspect that employment growth will slow markedly, meaning that consumer spending is likely to soften quite substantially next year.”