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Economy in Brief

UK Retail Sales Glow but Refuse to Shine
by Robert Brusca   November 18, 2010

Wind-aided retail sales- The total value of UK retail sales rose by 0.8% in October after a flat September and a declining August. It's not much of a revival for a series that is the equivalent of wind-aided in an Olympic sprint event that nonetheless comes nowhere close to breaking a record. The added 'push' comes not from the wind, but from the coming hike in the VAT (value added tax) that will take effect in 2011. Consumers seem to have begun to ramp up purchases ahead of the tax, a process that could cause UK GDP to see a surge in Q4 and then take a hit in 2011-Q1.

The VAT facts of life - The UK VAT is scheduled (pronounced UK-style as sheesh-yould) to go up to 20% from 17.5% in January. That's an increase of 2.5 percentage points but also an increase of nearly 15% in the VAT itself (14.3%). Consumers purchasing 1,000 pounds of goods or services into 2010 will get an effective 25 pounds of extra 'bang for buck' (kibosh for the quid? or Quid-go-pro?) compared to waiting and shopping in 2011.

Shopping impact- Shopping the post-Christmas sales in 2011 will not seem as smart once the added VAT is paid. Consumers will know this and so we can expect their spending patterns to be appropriately altered. While the amount of the tax hike is large in percentage terms (nearly15%) it is still a relatively small impact on purchases overall at just 2.5%. It is hard to say how much this alteration will affect spending patterns.

Behavior of merchants is key – The coming VAT hike is more likely to have an impact on merchants offerings sales to the public as they can tout an extra 'discount' from the tax man for consumers that shop in 2010 instead of in 2011. If the merchants push their normal sales forward into 2010 then the impact on spending patterns could be larger. Since the day after Christmas (more or less) is generally a sales holiday in the UK (Boxing Day) sales as a custom are conducted at the end of the old year instead of in the New Year. That custom could limit the impact of the VAT sales shift. In the US sales usually start the day after Christmas and progress throughout January as merchants use sales as a means to unload unsold inventory and to re-liquefy for the new selling season.

The ramp up effect - Apart from this speculation there appears to be some ramp up in sales already ahead of the holiday period after a number of listless months in the UK. Nominal sales are rising and real sales are up after two straight months of decline. We have both the oncoming Christmas season and the tax incentive to account for in this increase but only the coming tax rise is not accounted for by the seasonal adjustment factors in retail sales. Meanwhile, austerity is in train in the UK so it is hard to explain the rise in sales as part of any macro-economic surge in the beleaguered UK economy.

A bounce is bounce is a bounce – or is it? Sir Isaac's untold rule of motion - We must conclude that the bounce in UK retail sales will be a bit suspicious if it continues to play out through year-end. We caution that you be prepared for a swelling of sales in late 2010 to be offset in early 2011. As there is only 2.5% at stake, the shift of expenditures should not last long – not beyond Q1 of 2011. On today's retail sales news the foreign exchange market remained listless and did not respond, acting as though the blip up in sales did not have any real meaning. But, after a series of months with positive numbers, it may be harder for markets to ignore positive news. Even so, come January we would expect reality to bite… so be careful to keep perspective on the UK data later in the year. Things may not be what they seem. What bounces up may bounce down.

UK Real and Nominal Retail Sales
 Nominal Oct-10 Sep-10 Aug-10 3-Mo 6-Mo 12-Mo Yr Ago Qtr-
Retail Total 0.8% 0.0% -0.4% 1.8% 3.1% 2.1% 2.6% 4.2%
Food Bev & Tobacco 0.4% 0.5% -0.4% 2.0% 2.4% 1.9% 3.2% 3.8%
Clothing footwear 0.2% 0.8% -0.3% 2.9% -0.4% 4.9% 3.6% 3.9%
 Retail Volume: all 0.5% -0.5% -0.4% -1.5% 3.4% -0.1% 3.2% 0.2%
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