Consumer sentiment and spending data this morning rounds off the deluge of UK economic data this week and gives the first flash answer to the question on the lips of every UK economist at the moment: how is the UK consumer faring under the pressure of higher inflation?
At a headline level, the data doesn’t offer a direct answer. The GfK consumer confidence indicator for May printed at -40 this morning, 2 points lower than April’s reading and a joint 40-year low. In isolation, this data highlights that a recession is highly likely in the coming months as one is usually indicated by the measure falling below -30 in recent history. However, retail sales volumes for April suggest that the lower consumer confidence is yet to be seen in the latest spending data as sales volumes actually increased by 1.4%, outstripping expectations for a 0.3% decline from March. This was largely due to the rise in food store sales, which contributed 1.1% to the headline figure. Food store sales were largely driven by higher spending on alcohol and tobacco in supermarkets (+8.4%).
However, the headline retail sales data overstates the consumer picture in April.
By looking at a rolling QoQ basis to strip out the volatility in the monthly series, retail sales volumes fell by 0.3%, even after adjusting for the upwards revision to March’s data (from -1.4% to -1.2%), to show a continuing trend of slowing consumption levels. The softness in retail sales isn’t just visible in the rolling quarterly trend, but also on an industry basis within the April data. Non-food store sales fell by 0.6% MoM, driven largely by the contraction in other non-food stores (-3.3%) and household goods stores (-0.5%), which more than offset department stores and clothing stores (+1.3%). This suggests that discretionary spending by consumers is starting to be trimmed; this is usually the first sign that consumers are feeling a reduction in their real incomes. Additionally, the rise in food store sales wasn’t due to the rise in food sales, but in fact growth in alcohol, confectionery and tobacco sales. Although this is only one data point, it could show a growing trend of consumers substituting their social spending patterns towards staying in to save more money.
On the whole, this week’s data confirms the difficult position the Bank of England finds itself in. Inflation pressures are mounting and could start to filter through into higher wage negotiations if they prove persistent; this is the BoE’s worst fear at present.
Meanwhile, consumption data suggests the UK economy is set to start contracting in the coming months once households really start to feel the squeeze from persistently higher inflation pressures. After factoring in a bleaker macroeconomic outlook over the course of the week as the inflation and labour market data came out, and the weeks prior in the aftermath of the Bank’s May 5th decision, the pound was little impacted by today’s consumer data. However, sterling’s sensitivity to how the UK consumer is reacting to the cost of living crisis is likely to increase over the coming months.
The drop in consumer confidence below -30 tends to indicate an upcoming economic contraction
Simon Harvey, Head of FX Analysis