UK spending spree rages on, but can it last? - ING

James Smith, Economist at ING, notes that the UK retail sales continue to drive higher, but as household incomes get squeezed by higher inflation, spending could take a significant hit in 2017.

Key Quotes

“The 0.5% MoM increase in retail sales (ex fuel) in November is probably almost entirely thanks to the increasing prominence of Black Friday in the UK. Sales of household goods surged by 6% and online retailers (so-called non-store sellers) saw purchases increase by 3.8%. This is a relatively new event in the UK and thus is not properly accounted for in the seasonal adjustment process as of yet.”

“But even if you ignore Black Friday, UK retail sales have been surprisingly strong in recent months. On a 3 month moving average basis, the YoY growth in sales (ex. fuel) of 6.1% is the highest since 2004. The big question now is: can this last?”

“Rising fuel and food prices have resulted in a dramatic rise in inflation expectations (2.8%, according to a BoE survey). This appears to be hitting consumer confidence, perhaps as households acknowledge that disposable incomes are starting to come under pressure. We expect inflation to rise above 3% next year, which given the more subdued outlook for wage growth, could significantly hit consumer spending next year.”

“Markets currently think there is a 37% chance of a Bank of England rate hike by the end of 2017. We disagree – we think a rate cut is much more likely, given the weaker outlook for investment, hiring and consumer activity.”