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Economy in Brief

UK Growth And Retail Sales - Going Nowhere... The Flat-Lining Economy
by Robert Brusca  September 15, 2011

UK retail sales were flat in August. While three-month sales growth rates showed some life, UK retail sales have all the earmarks of a sector with not much going on. UK inflation remains stubborn with the HICP up by 4.5% Yr/Yr in August. Nominal sales have a steep hill to climb to post increases in sales volumes. Even so the sales volume index compiled by using an inflation metric specifically calibrated for retail sales shows that sales volumes did in fact pick up over three months compared to six months despite a drop in sales volumes in August.

UK sales have edged higher with three-month volume growth at a 2.6% pace, a six month pace of 1.3%, and a year/year pace of nearly flat at 0.1%. Over the previous 12-months retail sales volumes had been up by 0.8%. As a result, sales volumes in the UK have not even risen by 1% over the past 24 months.

The chart at the top relays that message as it offers an overlay of retail sales with calculations made for annualized growth over three-months six-months sand twelve-months. On no horizon do sales really seem to making any push. Sales have been left to oscillate in a relatively narrow range for over a year.

The UK is floundering as its austerity program has suppressed growth instead of stimulating the private sector. With the EMU continuing to struggle just next door, there has been little increase in demand for UK goods from the Euro-Area. The idea that the restrictive aspects of austerity including the VAT tax hike would be overcome by the competitive powers of the free market once the fiscal future for the UK had been laid out and fears of runaway fiscal imbalance had been laid to rest have proved to be unfounded; a good lesson for the US to learn from, perhaps?

It is good thing for policy to act and to get its fiscal house in order. But an economy coming out of recession and a financial crisis probably needs a little more help that it gets from substantial consumer tax hikes.

What I would term ‘the great German experiment,’ since it was championed by Germany as the G7 pushed the new Obama administration’s plea for stimulus aside in the wake of the recession and financial crisis, has become a clear loser in the annuals of economic history. The German experiment which has been to run austerity in the earliest stages of an economic upturn, and restore a sense of fiscal balance first, has failed everywhere it has been tried. Moreover, it has held back growth in adjacent economies and worsened the lot of fellow EMU nations whose economies were not as strong as Germany’s to start. It has exacerbated the European debt crisis.

This German gambit has been the opening move that was at the same time a closing move; I would give it the name gambit-mate. It has been like moving your own queen into check mate on the first move of a chess match (if that were possible). This experiment while grounded in the most conservative of financial wisdoms, has done nothing but to reinforce the notion that Keynes, after all was right. Reverse Keynesian policies that hike taxes and contract the government sector early in a recovery do not stimulate growth but rather are more likely to kill the incipient recovery, like a real world game of whack-a-mole played with real clubs and real people.

Now that the UK seems to have learned that lesson the question is whether it will simply sit and try to live with this sluggish growth or give up some of its hard-won fiscal ground to try and stimulate growth with a new, more conventional, program. There already are rumblings that the current course will not work. But with a parliamentary form of government a plan that is not working should not be left in place for too long or the opposition will gain the upper hand. With real retail sales volumes up by less than 1% over 24 months the result speaks pretty clearly to the need for the UK to do more. But will it or when will it? These are the great unanswered questions.

UK Real and Nominal Retail Sales
Nominal Aug-11 Jul-11 Jun-11 3-MO 6-MO 12-MO YrAGo Q-2-D
Retail Total 0.0% 0.8% 0.3% 4.6% 3.0% 4.7% 2.3% 3.1%
Food Bev & Tobacco 0.1% 1.5% 0.5% 8.5% 5.9% 5.0% 0.4% 5.1%
Clothing footwear 1.3% 0.3% 0.7% 9.6% 5.8% 4.7% 5.9% 4.1%
Retail Volume:All -0.2% 0.2% 0.7% 2.6% 1.3% 0.1% 0.8% 0.7%
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