The devil in the UK retail data

Recent UK retail sales volumes have exceeded expectations, but the data’s volatile nature requires UK policymakers to interpret recovery signs with caution.

Retail sales rose sharply in the United Kingdom during December, but spending growth was more muted than headlines suggested. It's a perfect example of why focusing on a single month of data is rarely a good idea.

Retail sales volumes in the UK rose by 2.6 per cent in December, significantly higher than expectations, to be 5.3 per cent higher over the year. It sits in stark contrast to the comments made by some British retailers (including Tesco) regarding weak sales over the Christmas period.

The UK has been characterised by improving data for some time, with the unemployment rate declining at a much faster rate than the Bank of England and its governor Mark Carney expected. At first glance, this retail sales data would appear to be of the same vein. However, it is not as strong as initial analysis suggests.

UK retail sales data is hugely volatile – so volatile that the month-to-month movements don’t mean a great lot. Growth of 2.6 per cent in December appears strong but volumes in the December quarter only rose by 0.3 per cent. Rather than record sales volumes, retail sales growth actually slowed significantly over the past three months.

The real strength in retail was during the September quarter, when sales volumes rose by 1.6 per cent.

Graph for The devil in the UK retail data

Over the past three months, sales volumes for non-food retailers rose by 1.4 per cent compared with a 0.3 per cent decline for food retailers. Smaller stores have driven growth in 2013, providing some evidence of a cyclical upswing given how sensitive small retailers tend to be to the business cycle.

Online sales continue to account for a growing proportion of UK spending. The value (as opposed to the volume) of online sales rose by 2.8 per cent in the December quarter to be almost 15 per cent higher over the year.

Online retailing in the UK is at a more advanced state than in Australia, but the growth in the sector provides some insight into the future and challenges for bricks-and-mortar operations both in the UK and Australia (Britain’s Christmas ghost of retail future, January 10).

On the whole, this has to be viewed as a positive retail report, given the market expected growth of just 0.2 per cent in December. But context is important and, as the graph shows, retail spending growth was fairly modest throughout the December quarter.

It's unlikely that there will be any policy implications.

Although the UK’s labour market has improved and consumer spending growth was solid over the past year, the Bank of England remains cautious regarding the sustainability of the current recovery. It would be surprising if it raises rates in 2014, even if the unemployment rate dips below its forward guidance threshold of 7 per cent. The market currently expects that the unemployment rate declined to 7.3 per cent in December, from 7.4 per cent in November, with the data released on Wednesday night.

The BoE will be concerned about wage growth and labour productivity, as well as the strength of the pound and concerns regarding business investment. While the economy is undoubtedly improving, there is still a number of pressing issues that could stop the recovery in its tracks and enough justification for the BoE to hold off for some time yet.

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