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Economy in Brief

U.K. Retail Sales Fall Sharply and Raise Concerns; As Elsewhere Life Goes On
by Robert Brusca  April 21, 2016

U.K. retail sales fell sharply in March dropping by 1.4% after falling by 0.7% in February. These two drops followed a sizeable hike of 2% in January. But that 2% rise is less impressive than it seems having followed a drop of 1.2%. Welcome to the world of volatility and playing the game of `Where's Waldo?' with trend. On balance, U.K retail sales volumes have fallen month-to-month in five of the last eight months. Over this period sales are still advancing at a 1.8% annual rate. But over the last four months they are falling at 3.1% annual rate and the implications for Q2 growth are now decidedly negative.

Retail sales trends already are dodgy

The table shows that U.K. nominal sales trends post negative results over 12-months, six-months and three-months. However, real retail sales (aka retails volumes) are up at a 0.7% pace over three-months, lower at a -0.2% annual rate over six-months, and higher by 2.7% over 12-months. Moreover, what's the fuss? U.K. retail sales volumes are cranking at 3.1% annual rate pace in the just-completed Q1 period. Isn't that quite good?

The arithmetic of a bad start

What is at issue is where sales stand relative to moving forward. And this is a bit technical but ingrained in the arithmetic of quarterly growth rates. The answer is that right now quarterly retail sales growth has `inherited from Q2' a very weak growth profile. It is true that we do not yet have any retail sales observations for Q2. So how is that the case, you may ask? The point is to see that at the very end of Q1 (which is comprised of three monthly observations) real sales sit at a very low level relative to their quarterly average. So we can calculate growth as of March relative to the same Q1 base (if there is no revision to Q1 sales) that will be used as a base to express growth in Q2. As of March, retail sales in the U.K. are shrinking at an11.7% annualized rate relative to their Q1 base. That is what is being `inherited' by Q2. It's a disadvantageous start.

Starting off in hole

Think of this as putting retail sales in a hole to start Q2. Real retail sales also began Q1 in hole with sales falling at 5.2% annual rate in the last month of Q4 relative to the Q4 average. But then sales popped, rising by 2.1% in January and boosting sales substantially to a positive rate of growth (despite sales declines over the next two months). So this notion of `inherited' growth is not necessarily the dominant factor. Since growth in retail sales is uneven, and since large gains often follow large set-backs (and vice versa), it is good not to make too much of such circumstances until or unless they seem to be relevant. But this quarter's disadvantaged start is a big one. We will not know until we get April retail sales where we stand.

BRC survey finds weakness

However, the BRC (British Retail Consortium) monitor of sales was also weak in March as year-on-year sales went flat. This is roughly in line with overall nominal sales being down by 0.1%. In March alone the BRC `like-for-like' gauge showed a fall year-over-year of 0.7%. So the retail sales report is building on other signs of weakness.

CBI is still upbeat

However, the survey reported out by CBI (Confederation of British Industry) for retailing in March showed more midrange responses to sales results and actually was slightly more upbeat on sales prospects as sales compared to a year ago for April were expected to be much better than that same expectations formed in February for March on the same basis. There is no indication that retailers throwing in the towel on the outlook.

Still too confusing to call...

On balance, we will have to let the British sales drama unfold and wonder too if all the hub-bub over Brexit is causing any retail squeamishness. The current data are weak enough to warrant being pointed out but not decisive enough to cause any policy shift to occur. But the Bank of England will be watching the April data closely given the trends in place at end Q1.

Some strength in France

Quite separately there was much more upbeat news out of France where the INSEE survey of industrial expectations rose sharply to its highest reading in seven months. At a level of 104.5, it was last higher in September 2014 at 104.8. The index has jumped in April from 102.2 in March. Still, industrial confidence on this measure has only a 67th percentile standing when placed in its historic queue. French industrial businesses are feeling better, but their standing is still only moderate by historic standards. Orders and demand are generating the most optimism while the recent trend and likely trend of production is flagging a bit. The `likely sales price trend' remains far below normal historic standards despite advancing somewhat strongly in April.

Oil provides some `good news?'

Today finds oil prices on the move higher as the IEA is now anticipates a relatively large reduction later in the year of output by non-OPEC members. Specifically, the International Energy Agency (IEA) said 2016 would see the biggest fall in non-OPEC production in a generation, helping to rebalance a market beset with oversupply. Falling commodity prices have been a big drag on growth in the developing economies worldwide as well to all energy-related companies. Despite the boost lower prices should give to consumers, higher oil prices are now deemed growth-positive and lower prices are growth-negative. Today found some good news on that scorecard.

Good news in Greece

Greece reported a primary surplus in its balance of payments that beat the target set in its bailout agreement.

ECB on hold or holding on?

The ECB put policy on hold, but there are reports that Draghi is withstanding tremendous attacks and criticism from various Germans in policy circles for the effects this policy is having back home in Germany. It appears that nobody really likes monetary policy in the EMU. It's policy made by a committee. Fancy that?

Japan: still fighting off nature

A bit farther away in Japan, the senior loan officer survey in April found reduced load demand in at Japanese banks. But the authorities there are trying to puzzle out the impact on the economy of the latest natural disasters to strike as Japan has been hit by a series of earthquakes.

Upshot: confusion in the outlook; Showdown at the ECB corral

All of this muddies the waters of economic tradeoffs. The developments with U.K. retail sales are a risk factor. The improvement in French industrial confidence is a good sign even though the services sector in France showed a slight setback in the INSEE service sector survey. While the ECB is on hold, the Swedish central bank upped its QE while holding its negative rate structure in place. Sweden is going farther down a road Germans simply do not want to travel. The ECB is being torn in different directions by members with very different views of how the economy works. Germans are insistent that German economic dogma holds and works and is the path to economic salvation. They are seeing backlashes at home for what the ECB is doing. It never occurred to the Germans that their own approach might be too bitter a pill for the rest of Europe to swallow in a single currency block. Similarly, much of the rest of the block was totally unprepared for the way German stubbornness and low growth, low inflation and fiscal consolidation could wind up holding them back and pulling European policy back more to German standards. The EMU has been a wakeup call for everyone and for the moment seems to mean more sleepless nights for everyone.

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