The standard analysis of the outlook for the UK economy over the next few years incorporates a view that growth will disappoint, in part, because consumer spending will be weak. Consumers will retrench, so the argument goes, because they have taken on too much debt in the past and are now seeking to pay it off.
But the latest retail sales data, published today by the Office for National Statistics, do not show any signs of consumer retrenchment. Quite the opposite, with retail sales volumes up 0.9 per cent in January after a 0.6 per cent increase in December.
What is most noteworthy, though, is not sales volumes over the last couple of months, but sales values over the last three years.
Taking the latest three months (to smooth out month-to-month fluctuations), sales values are 4.9 per cent higher than a year ago and have increased at an annual rate of 4.1 per cent over the last three years. This compares with an annual rate of increase of 3.6 per cent between 1997 and 2007. Sales values are growing faster now, when households are supposed to be retrenching, than they were during the period when households were being profligate and taking on lots of additional debt.
The difference is that there was no inflation on the high street between 1997 and 2007. An increase in sales values of 3.6 per cent a year equated to a 3.5 per cent increase in sales volumes. Over the last three years, inflation has averaged 3.2 per cent, so an annual increase in sales values of 4.1 per cent led an increase of just 0.8 per cent in volume terms.
But inflation has fallen recently. In the last four months, high street prices have increased by just 0.3 per cent. If it remains low, and sales values continue to increase at their recent rate, the growth in sales volumes will pick up accordingly. A combination of a 4 per cent increase in sales values, 1.5 per cent inflation and a 2.5 per cent increase in sales volumes at the end of 2012 is quite plausible.
Of course, much could go wrong to throw this projection off course: a sharp rise in the oil price, firms cutting back on jobs or a serious deterioration in the eurozone fiscal crisis. But if it turns out to be broadly right, consumer spending and real GDP growth will be looking a lot healthier by the end of the year and the Bank of England’s optimism on growth in 2013 (its latest projection is for growth of close to 3 per cent) will not be looking as misplaced as it does today.
This would change the nature of the political debate about the economy. At the present, the government is having to fend off criticism that its policies are contributing to the economic weak patch.
Stronger retail sales volumes, consumer spending and GDP growth would make it easier for the government to say that its policies are working. Of course, this doesn’t make them right. But stronger growth will mean the government’s opponents have to develop new lines of argument against them.
Tony Dolphin is chief economist at IPPR