U.K. Retail Sales Fall in September but Strong Third-quarter Result to Lift GDP say Economists

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- U.K. retail sales fall faster than expected during September.

- But strong quarterly growth means spending should lift Q3 GDP.

- And renewed Brexit deadlock, declining inflation, dominate agenda.

Retail sales declined faster than expected during September, according to Office for National Statistics data released Thursday, but economists say that earlier growth will still lift U.K. GDP for the third-quarter. 

Retail sales fell by -0.8% during September, more than reversing the 0.3% gains seen back in August, which was a deeper decline than the -0.4% that financial markets had been looking for. 

This was the result of a decline spending in food stores, which rose sharply during the preceding months given the abnormally warm summer.

That number pulled the annual rate of growth down to 3%, from 3.4% previously, but the uplift in consumer spending for the third-quarter as a whole was still a strong one. Even if it was a little lower than growth in the second-quarter.

"Although September’s retail sales figures were weaker than expected," says Ruth Gregory, an economist at Capital Economics. "Retail spending rose by a strong 1.2% over Q3 as a whole, suggesting that sales will provide a welcome 0.1ppt or so boost to Q3 GDP growth."

Third-quarter retail sales were boosted by an increase in spending on luxury items such as watches and jewlery, which is a positive omen for the economy. Although growth was higher, at 2%, for the second-quarter.

"Crucially, though, with inflation continuing to fall back – note that the retail sales deflator slipped from 2.2% in August to 1.8% – and pay growth on the up, there should be scope for consumer spending growth to gather some momentum further ahead," Gregory adds. 

Retail sales account for one third of overall household spending, and the latter itself accounts for a significant portion of GDP, so spending data often provides important insight into the pace of U.K. economic growth.

Markets care about this because of the influence rising or falling consumption can have on inflation. It's inflation that central banks are attempting to contain when they raise interest rates, and changes in rates are the raison d'être for most moves in currency prices.

"Looking ahead, mounting uncertainty about the economic outlook as the Brexit deadline draws nearer without a deal will weigh on confidence, while the high level of saving intentions suggest that bigger increases in real wages, as inflation falls back, won’t necessarily be fully spent. Accordingly, retail sales likely will be underwhelming in the crucial run-up to Christmas," says Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

U.K. growth already slowed from 0.4% at the end of 2017 to just 0.1% in the first quarter. It rebounded in the second quarter, with GDP rising 0.4%, but consensus is that output will increase by only a paltry 1.3% for 2018.

Thursday's data comes hard on the heels of the latest inflation numbers, which showed consumer price pressures going into retreat once again in September. The consumer price index fell from 2.7% to 2.4% last month while core inflation declined from 2.1% to 1.9%. 

Both numbers fell faster than the market had expected, undermining arguments by the Bank of England and some pundits that mounting price pressures will demand further interest rate rises from the central bank during the quarters ahead.

As a result, regardless of what Thursday's spending data might mean for inflation further down the line, it won't do much for the Pound or those who are hoping to see the Bank of England become more "hawkish" in the coming months.   

The data also comes at a pivotal point in the Brexit negotiations. Officials from both sides of the English Channel had been seeking to agree terms of the U.K.'s withdrawal before Thursday's European Council summit wraps up, but any deal now looks as if it may not come until some time in November or December.  

If an agreement is not reached in time for the council to approve it in 2018 then the odds of a so called no deal Brexit will have risen, because the eventual deal must be approved by the council and ratified in all parliaments across the EU before the U.K.'s March 29, 2019 exit date.

Disagreement over how to manage the Northern Irish border in the event a trade deal is not agreed at a later date has been standing in the way of a deal after Brussels rejected Prime Minister Theresa May's "Chequers plan" at a summit in the Austrian city of Salzburg in September.

The EU's current Irish border proposal of customs union membership and continued "regulatory alignment" for Northern Ireland would mean either all of the U.K. remaining inside the EU customs union and single market, or a de-facto sea border being installed between the island of Ireland and Great Britain.

The latter is something PM May has said "no U.K. Prime Minister could ever agree to". However, the government is widely reported to be offering a series of further concessions to the EU, including customs union membership for all of the U.K., in order to get a "deal" done this month.

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