UK retail sales drop as price deflator spikes
UK retail sales fell in March to record their first quarterly decline since 2013 as the falling pound sent shop prices soaring, which suggests the consumer spending slowdown is gathering pace and that the Bank of England may not raise interest rates for some time.
Retail sales dropped 1.8% month-on-month in March, worse than the 1.4% the previous month and much worse than the 0.5% fall the market expected.
March sales rose 1.7% on the same month last year, the Office for National Statistics reported, which was well short of the 3.7% year-on-year rise in February and the 3.3% consensus forecast.
For the first three months of the year, retail sales fell 1.4% compared the first quarter last year, the third consecutive month this measure has declined.
Excluding automotive fuel sales were down 1.5% m-o-m and up 1.7% y-o-y, again both much worse than predicted.
A cause of the slowdown is that the effects of sterling’s Brexit-related slump has lifted the retail sales deflator to 3.3% -- its equal-highest since 2012.
Falling retail sales for three months suggests the consumer spending slowdown is gathering pace and adds to other evidence indicating that the economic recovery has slowed since the end of last year, said Ruth Gregory at Capital Economics.
Even allowing for fact that a later Easter in 2017 pulled some sales back to April from March, the figures were "dire" said economist Howard Archer at IHS Markit and fuelled his belief that weakened consumer spending pulled UK gross domestic product growth down to 0.4% quarter-on-quarter in the first quarter of 2017 from 0.7% quarter-on-quarter in the fourth quarter.
Falling retail sales provided "compelling evidence that consumers have reined in their spending as markedly higher inflation eats into their purchasing power in tandem with subdued earnings growth. While consumer spending appears to have held up better on services, there are also signs that there has been some slowdown there as well."
This reinforced the IHS view that the Bank of England will not be raising interest rates any time soon -- through 2017 and 2018, and very possibly for some time beyond -- as their concerns over national growth force them to overlook a likely prolonged inflation overshoot.
"The MPC is very aware that consumer spending poses an appreciable downside risk to the growth outlook," he said, acknowledging that much will depend on how the Brexit negotiations develop.
However, Gregory countered that some fall back in retail sales volumes always looked likely after February’s upwardly-revised 1.7% monthly surge.
The ONS figures, she said, are likely to overstate the weakness in overall household spending growth in the first quarter, of which retail sales only makes up a third, with spending off the high street seeming to have held up rather better.
"Meanwhile, with credit conditions supportive, and consumers’ confidence still quite strong, we still think that overall household spending will only slow gradually this year – from 2.8% in 2016 to 2.0% in 2017 – rather than collapse outright."
Indeed analyst David Cheetham at XTB said more recent data had showed better than expected level of retail spending over the Easter weekend, with Barclaycard reporting a 13% increase for in-store purchases.
Secondly, due to the month on month nature of the release, the prior strong print of +1.7%, which the ONS revised higher from 1.4% will weigh on March in relative terms.
As such there was only a mild negative reaction in the pound, falling back below 1.28 against the US dollar since the release.
"This data point alone doesn’t seem to present enough of a reason for the market to change course and price remains substantially higher on the week following Tuesday’s sharp rally and looks well supported going forward," he said.