Too early to call time on the consumer spending boom
Retail sales have seen their worst decline since 2010. But rising consumer credit figures suggest we’re not at the end of the consumer spending boom just yet.
Retail sales volumes declined by -1.4% in the first quarter of 2017, the worse quarterly decline since the first quarter of 2010 (itself the worst quarterly decline on ONS records back to 1996).
The four quarter growth measure fell to 2.0% cent, the lowest since 2013.
Changes in the volume of sales (green line on the chart below) depend on changes in the amount spent (or ‘value’ spent, the red line) and changes in the price (grey column). So unchanged cash spending (0% growth), in the face of sharply rising prices (1.4% growth) results in a sharp decline in the volume of purchases. i.e. we spent the same, but prices went up, so we got less for our money.
Retail sales index, quarterly growth
But as the graph also shows, this follows two quarters of very strong growth in sales values of 2.1% and 1.7% over the second half of 2016. Taken together, the half yearly growth of 3.8% in the second half of 2016 was the strongest on the available ONS data – as on the chart below.
Retail sales values, half yearly growth
Some unwinding of this was surely likely.
Especially with volatile figures, it makes sense also to look at four quarter growth (see the next chart). Here, while volumes have slowed significantly, due to rising prices, value growth is still high.
Retail sales, four quarter growth
What might explain these trends? There are competing forces here. On one hand real earnings are taking a hit, with nominal pay growth slowing and prices rising (here).
But on the other hand unsecured lending is still going strong. New car financing arrangements have boosted the sales and production of motor vehicles; at around 10%, consumer credit growth is its strongest since 2005 (fuller discussion). As the next chart shows, there’s no sign of a slowdown in consumer credit growth yet – apart from a (only) relatively weaker December.
Consumer credit, monthly increase £million
While the Bank of England and Financial Policy Committee have expressed concerns about consumer credit and the “Prudential Regulation Authority have launched a review of lending standards for credit cards, personal loans and dealership car finance” (FT, 4 April), the lending taps (for the consumer, not firms) are very much still open.
Weaker sales volumes will be a contributing factor to the likely weaker GDP growth figure in Q1. But it might be premature to call time on consumer spending.