UK Retail Sales, And The Slowing UK Recovery

August 19, 2021

The BOE has had a pretty good week in terms of macroeconomic releases, with most data coming in within their outlook.

Presumably, this means that their monetary policy is on track. But that might change with the release of retail sales data tomorrow, with expectations that the delta variant might have dented appetite from buyers.

The pound has been slipping through most of the month as the market adjusts to the idea that the BOE won’t be changing policy as soon as economists anticipated. That is because inflation came in as expected, and remained at the BOE’s target level.

Moreover, Bailey came out after the last meeting to say that they will be looking at “medium-term” inflation trends. This is like the Fed’s view of allowing “transitory” higher inflation, without explicitly saying it.

Will the dissent go away?

At the last BOE meeting, only Saunders said that it was time to end the QE program, arguing inflationary pressures. But with the latest CPI data, he might have changed his mind.

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The underlying issue, however, is a warning that a lot of UK businesses have been mentioning in their reports: they are not passing on as much of their operating costs to their customers as they would like. In fact, the producer price index has risen at more than double the rate of the consumer price index.

The pressure has to go somewhere

This idea of increasing costs for raw materials but not raising prices compresses corporate margins. This means they will have less capital for future investment and less potential for growth.

Businesses will have to manage that margin problem somehow, either by raising prices or cutting employees. The BOE doesn’t favor either option.

So far, the unemployment figures have come in line with the central bank’s expectations. They are still expecting a 4.0% increase in inflation, suggesting that they are hoping higher prices will resolve the margin compression problem.

But what about the consumers

Of course, higher prices mean that consumers are less reluctant to buy. Without rising retail sales, it will be hard for businesses to pass on costs.

The upside is that keeps inflation low, and the BOE can keep interest rates low to support the economy. The downside is that with lower profitability and growth potential, businesses will be unable or unwilling to take on debt, negating the support from monetary policy.

This is part of the explanation for the problem in Japan, where the BOJ can’t raise rates.

What we are looking for

Analysts expect the UK monthly retail sales to slow to 0.4% from 0.5% prior. On an annual basis, that implies a significant reduction to 6.0% from 9.7%.

However, the increased cost of fuel over the last several months can explain some of that variation. Assuming that retail sales remain generally healthy, rising crude prices, however, could pose an issue for the UK economy.

Analysts also expect the UK monthly retail sales ex fuel to come in at 0.3% compared to 0.5% last month. But on an annualized basis drop to 5.7% from 7.4% prior.

By Orbex