UK: Stronger retail sales help to ease recession fears - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound has remained at stronger levels in the Asian trading session following the release yesterday of the stronger than expected UK retail sales report for July.

Key Quotes

“The report revealed that retail sales rebounded solidly by 1.4% in July following a contraction of -0.9% in June. The rebound was driven by non-food store sales which increased by 2.4% in July with even household goods store sales increasing despite more acute concerns over weakness in the UK housing market following the Brexit vote.

Admittedly, it is very early days and the UK economy is still adjusting to the Brexit vote shock but nevertheless the report reveals that consumer spending is proving more resilient than initially feared. The plunge in consumer confidence evident in the surveys since the Brexit vote does not appear to have resulted yet in a sharp pullback in consumer spending.

In the coming months confidence could begin to recover should consumers’ initial fears over Brexit ease. The labour market also performed better than expected in the run up to the Brexit vote. Employment expanded by a solid 172k in the three months to the end of June. The healthy labour market is helping to support consumer spending. The labour market is now likely to weaken following the Brexit vote, but reassuringly its flexibility and alongside the flexibility of the weaker pound should help the UK economy to adjust to the Brexit shock. A more resilient labour market would help to reduce the likelihood of a more marked slowdown in consumer spending.

As a result of the weaker pound and rebound in the price of oil, inflation will accelerate markedly in the year ahead. If wage growth remains subdued, the subsequent squeeze on real disposable income will result in slower consumer spending. The developments are broadly consistent with the BoE’s view that the UK economy will expand weakly but avoid recession.

The BoE has already eased monetary policy aggressively in an attempt to support confidence and reduce the likelihood of recession. The sharp decline in UK yields both nominal and real should keep the pound at weaker levels. The UK economy would have to surprise more materially to the upside to offer the pound more support given that the BoE has already clearly signalled that it is likely to cut rates close to zero later this year if the economy performs in line with their expectations. For the now the pound is set to remain within a consolidation phase at weaker levels. As the UK economy appears to be holding up better than feared, the risk of further sharp pound decline has eased.”