The UK consumer
* 2018 was a tough year for British retailers. According to the Centre for Retail Research, nearly 2,600 stores closed, the highest number since 2012. Recent high-profile casualties included HMV, Patisserie Valerie and Oddbins. Along with the structural shift to online shopping, high-street retailers are under pressure from a slowdown in consumer spending growth.
* Household spending has slowed since the EU referendum, with average annual growth of 3.0% in 2015 and 2016, falling to 2.2% in 2017 and 1.9% last year. It’s not just high street sales that have suffered. Car sales were 7% lower last year than in 2017, with the retreat from diesel playing an exacerbating role. House sales and mortgage lending also fell last year.
* The slowdown has been caused by a fierce squeeze on consumer spending, the product of a Brexit-induced fall in sterling coupled with sluggish earnings growth. More recently uncertainty about Brexit and growth have dented consumer confidence, which is down to its lowest level in almost six years.
* Housing activity has also softened. House prices are still rising, albeit by just 2.5% in the year to December, the slowest rate since July 2013. Sales volumes have fallen and the Royal Institute of Chartered Surveyors say that the outlook for the next three months is the worst for 20 years.
* This all looks pretty bleak. But one important element has turned positive for consumers. Real earnings growth, which deteriorated so badly in 2017 and 2018, is heading up as the effects of a weak pound on inflation fade and as earnings accelerate.
* Inflation fell to 1.8% in January, the lowest rate in more than two years and down from a peak of 3.1% just over a year ago.
* And after a long period of weakness growth in average earnings has consistently outstripped inflation since the middle of last year. Given the tightness of the labour market, with unemployment close to a 43-year low, and a marked decline in net immigration from the EU, labour shortages seem likely to persist. On average economists see UK wage growth at 3.0% this year and next, comfortably outstripping inflation which is expected to remain around the 2% mark.
* UK household balance sheets also look in reasonable shape. The debt-to-income ratio stands at 133%, down from 148% in 2007. While many countries, including the US and Germany, have lower debt levels, others, especially in Northern Europe, are more indebted. Total UK household debt has risen by 19% since 2010 but the value of housing and financial assets held by households has risen far faster, by around 40%. Meanwhile money is cheap and the average UK mortgage rate remains less than half of what it was ten years ago. More households have switched to fixed-rate deals.
* Agreed, consumer credit growth has slowed. Part of this is a question of supply as banks have tightened lending standards. It may also reflect the fact that, with consumer incomes rising, households simply have less need to borrow.
* As with many economic issues facing the UK much hinges on Brexit. A chaotic Brexit would hit sterling, fuel inflation and cause consumers to pull-back. Bank of England analysis foresees a sharp rise in inflation and unemployment in the aftermath of a chaotic Brexit. The Deloitte survey of Chief Financial Officers suggests corporates are positioning themselves for just such an outcome. Consumers take a pretty bleak view of the economic outlook and they, too, may be steeling themselves for the worst.
* If there were to be more orderly outcome consumers look well-positioned to increase spending in the second half of the year. With consumption accounting for almost two-thirds of UK GDP the mood of the consumer will have a major impact on growth this year.
OUR REVIEW OF LAST WEEK’S NEWS
The FTSE 100 equity index ended the week down 0.8% at 7,179.
Economics and business
* The UK posted the largest ever monthly fiscal surplus in January, making borrowing for the financial year-to-date the lowest in 17 years
* The number of unfilled job vacancies in the UK hit a record high in the three months to December, in a further sign of a tightening labour market
* The number of EU migrant workers in the UK fell by 61,000 in the fourth quarter from a year earlier, the number of non-EU workers increased by 130,000
* German business confidence fell to its lowest level since 2014 this month
* Euro area manufacturing activity fell to a near six-year low in February, according to preliminary PMI numbers
* ECB members voiced concerns “about an increasing impact of trade protections, and an escalation of trade conflicts, on the global outlook over time”
* President Donald Trump hinted he may extend the current 1 March deadline for a trade deal with China and postpone an increase in import duties on Chinese goods
* Mr Trump appeared to have softened his tone towards Chinese tech firm Huawei by tweeting, “I want the United States to win through competition, not by blocking out currently more advanced technologies”
* Volkswagen chief executive Herbert Diess warned that import tariffs applied by the US could cost the carmaker billions of euros a year
* Honda announced that it would close its car production plant in Swindon in 2021 with the loss of 3,500 jobs, due to global changes in the car industry
* BMW and Daimler announced a joint venture to invest in driverless vehicles, ride-hailing and other new projects due to competition from tech firms such as Uber
* The Bramble Cay melomys, a rat-like rodent native to Australia, is believed to be the first mammal to have become extinct because of global warming
* Swiss bank UBS was fined a record €3.7bn in France after it was found guilty of helping wealthy clients evade paying tax
* The UK government extended the no-fly zone for drones around airports to three miles from 0.6 miles following issues at Gatwick airport last year
* Left-wing democrat Bernie Sanders announced he will run for the US presidency in 2020
* Goldman Sachs and Apple will issue a joint credit card which pairs with the new iPhone’s features to help users manage their money
Brexit and European politics
* Eight Labour and three Conservative MPs quit their respective political parties to form a new independent group in parliament
* Michel Barnier, the EU’s chief Brexit negotiator said he was still waiting for a “concrete proposal” from the UK and is more worried than ever over an ‘accidental’ no-deal Brexit
* The FT reported one senior EU diplomat as saying that there had been an “evaporation of trust” with Britain and that Mrs Theresa May was “not even close” to a realistic negotiating position
* Ratings agency Fitch put the UK on negative watch, indicating it may cut the country’s credit rating in the event of a no-deal Brexit
* Ireland published a package of emergency laws to help it respond to a no-deal Brexit
* A no-deal Brexit risks queues of up to 15,000 passengers each day for Eurostar train services at London’s St Pancras International, according to a UK government report
* European Commission president Jean-Claude Juncker said that Brexit is now in God’s hands
And finally… A report from Barclays which examined the contribution of the farming and food sectors to global warming said, “Burping cows are more damaging to the climate than all the cars on this planet.” - cattlestrophic