“The household savings rate has already slumped, consumer credit and instalment debt are rising, employment levels look maxed out, and real incomes are flat or falling”by George Magnus / April 24, 2017 / Leave a comment
In announcing the June General Election, the Prime Minister assured the nation that the economy is in good shape and in good hands. She cited in particular growth that was coming in above expectations, and high consumer confidence. The March retail sales data published last Friday will not make much of a dent in the government’s election narrative, but they do warn, from an economic perspective, that Theresa May has probably timed this election to perfection. Things can only get worse.
The retail sales data themselves are not conclusive. They measure only 30 per cent of total household consumption, which, in turn, makes up 60 per cent of GDP. What they showed was a 1.8 per cent fall in March, revealing the February rise of 1.7 per cent to be a blip after three consecutive monthly falls. The 1.4 per cent fall in the first quarter is the biggest since 2010, when there was one-off drop related to a rise in VAT. What they indicate is that the decline in Sterling that is pushing up in inflation (2.3 per cent in February and poised to climb still higher), is eating into low wage and salary increases, leaving real incomes flat or falling.
Might this change? There doesn’t seem to be any indication that wage and salary growth is accelerating, in spite of high levels of employment. Maybe the fall in Sterling is over, because since the election was called, it has risen quite sharply. The reasoning in financial markets is that May is after a bigger majority so that she can try and negotiate a soft Brexit, sidelining the right-wing of her party. Yet you could argue this the other way with equal conviction: a big majority in the Commons could allow the government to agree any form of Brexit, however bad. Or you could argue that the government isn’t really in control of the outcome of the Brexit process, anyway.
The jury on Sterling, then, is out. It might have bottomed for now, but it remains delicate. Why? The simple answer is that Brexit will raise barriers to trade, and labour and capital mobility. There are no two ways about it. This means that the gains the UK has made in terms of specialisation, efficiency and productivity will lessen or be reversed. Sterling is an important indicator that this is so. So is the relative behaviour of commercial and residential property prices. The real estate sector in the FTSE indices has underperformed the headline indices significantly and the differential performance could get a lot bigger if financial service firms relocate businesses to European Union capitals, or New York.