January’s jump in retail sales provided a glimmer of positive news about the health of the UK consumer on Friday after grim data earlier this week showed the country slid into recession at the end of 2023.
But analysts were quick to caution against overly optimistic conclusions from the sales volumes, which rose at a month-on-month pace of 3.4 per cent, given the broader picture of stagnation that continues to hang over Britain.
Retail sales may well gain further momentum in the coming months as real incomes grow alongside falling inflation, but this is unlikely to translate into stellar growth given the underlying weakness in UK productivity.
With the Bank of England forecasting that gross domestic product will expand by just 0.25 per cent this year, the country is a long way from finding its way out of the low-growth trap that seems likely to bedevil the ruling Conservatives in the election expected this year.
The pressure on Prime Minister Rishi Sunak to meet his pledge to “grow the economy” was underscored overnight with the loss of two more seats to Labour in by-elections in England.
“We would be reluctant to assume that this signifies the return of a rip-roaring consumer economy,” said Ellie Henderson, economist at Investec.
The bounce in retail sales volumes reversed a sharp fall of 3.3 per cent in December, leaving them hovering at similar levels to November 2023. Analysts said difficulties in seasonally adjusting numbers around the close of the year might have contributed to the gyrating figures.
“The rapid rebound suggests the dip was more likely down to the ever-shifting seasonal trends in spending, which have continued to change pace since Covid-19,” said James Smith, economist at ING bank.
In addition, volumes remain 1.3 per cent below pre-pandemic levels, confirming the broader picture of stagnation that was painted by Thursday’s GDP data. In 2023, overall household consumption increased by just 0.3 per cent, according to estimates from the Office for National Statistics.
UK output per head shrank by 0.7 per cent in 2023, falling every quarter last year, the ONS said. GDP per capita has not grown since the beginning of 2022, the longest series of declines or stagnation since 1955.
“Overall, the trend looks close to flat,” said Allan Monks, economist at JPMorgan, of the retail numbers.
The bigger than expected retail bounce last month may not be a reliable guide to this year’s consumer spending outlook, but there are some ingredients in place for further improvements in 2024.
Most importantly, further declines in inflation from the current 4 per cent towards the Bank of England’s 2 per cent target should relieve some of the pressure on household finances in the coming months — especially if drops are coupled with reductions in the central bank’s key interest rate.
Strong wage growth is now outpacing inflation, boosting disposable incomes. Inflation-adjusted total pay rose by 1.6 per cent in the three months to December, according to the ONS, the biggest increase since 2021.
Consumer price inflation will decline to just 1.5 per cent in April, according to the National Institute of Economic and Social Research, allowing the BoE to start cutting rates from their 16-year high of 5.25 per cent in May.
Given the better inflation picture, the Niesr think-tank is predicting an increase in real household disposable income of about 2 per cent in 2024-25.
ONS polling suggests people are starting to feel the easing of inflation pressures. Some 46 per cent of adults reported an increase in their cost of living over the past month, down from 76 per cent between March 22 and April 2 2023, according to a survey released by the statistics agency on Friday.
Households will experience a further modest lift because of the tax cuts announced by chancellor Jeremy Hunt in November, although those reductions will not change the longer-term trend of a surging tax burden that is heading to a postwar high.
Such improvements need to be seen in perspective, however. Analysis by Niesr shows that lower-income households are still set to be grappling with living standards that will be 7-20 per cent lower in 2024-25 than in 2019-2020.
In separate research, the Resolution Foundation think-tank found that GDP per capita is 4.2 per cent below its path before the onset of the cost of living crisis — equivalent to a £1,500 hit per person.
Given the continued flatlining of productivity, this broader picture of stagnation seems unlikely to change radically. A first estimate from the ONS this week showed output per hour was down 0.3 per cent in the final quarter of 2023 compared with a year earlier, and just 2 per cent higher than before Covid struck.
Jens Larsen, economist at the Eurasia Group consultancy, said the UK should enjoy brighter economic prospects this year than last but structural issues remained.
Interest rates are at high levels compared with two years ago and consumer prices are still rising, albeit more slowly.
“The recovery is nowhere near complete,” Larsen said, pointing to the weak supply side of the economy, with poor productivity growth and sluggish investment. “It is not a sharp cyclical rebound where you see production or incomes off to the races.”
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