Pound Gets Short-lived Boost from Retail Surge but Icy Conditions are Ahead

- Retail sales rebound in February but dark days are ahead.

- Bad weather to hit March retail and Q1 GDP numbers. 

- Lower inflation to boost retail spending and GDP later in 2018.

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The Pound enjoyed a short-lived boost against the Euro and Dollar during early trading in London Thursday as markets responded to a better than expected set of UK retail sales numbers for the month of February.

Spending on the high street rose by 0.8% in the month to the end of February, up from the downwardly revised -0.2% growth seen in January and far ahead of the 0.4% increase that markets were looking for.

On an annual basis retail sales were up by 1.5% when February’s number is compared with the same period one year ago, which is broadly in line with the growth seen over recent months but lower than that which prevailed in the early days of 2017.

With January’s numbers having been revised downward from +0.1% to -0.2%, the quarterly growth rate has fallen into negative territory and it will now take a substantial lift in March retail sales to prevent consumer spending dragging on economic growth for the first quarter.

“It would now take a monthly increase in excess of 2% in March to ensure that sales in Q1 match Q4’s 0.5% rise – which seems extremely unlikely given the disruption from the severe weather at the start of the month. Overall, then, the retail sector looks set to act as a small drag on overall GDP growth in Q1,” says Ruth Gregory, a UK economist at Capital Economics.

February’s retail numbers will provide important input into economist estimates of economic growth in the first quarter so will set the tone toward the economy over coming weeks and months.

“Crucially, February’s data cover the four weeks from January 28 to February 24, before the heavy snowfall commenced on February 27. As a result, all of the disruption caused by the bad weather will be concentrated in March’s data,” chimes Samuel Tombs, chief UK economist at Pantheon Economics.

Pantheon Economics predict February's inclement weather will see the next retail sales number fall close to 1% and that this will shave around -0.4% off first quarter GDP. 

"Looking ahead, retail sales should begin to pick up over the coming quarters as inflation falls below nominal wage growth, but growth will remain sub-par due to the ongoing fiscal squeeze and rising mortgage rates," Tombs adds.

The Pound was quoted 0.04% lower at 1.4136 against the Dollar following the release, after reversing an earlier 0.03% gain, while the Pound-to-Euro rate reversed its earlier loss to trade -0.16% higher at 1.1471. This latter move looks to be the result of broad weakness for the Euro rather than strength of the Pound.

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UK Economy Eyes Dividend from Lower Inflation 

Thursday’s data comes at a time when economic statistics have been muddied by unfortunate one-off events such as the closure of a key oil pipeline in November and February, as well as a period of inclement weather last month.

This and other factors have led some economists to conclude that economic growth probably slowed during the first quarter of 2018. However, there are grounds to think that it could soon pick back up again.

“GDP growth in Q4 was revised down unexpectedly, and the hard data for January suggests the economy got off to a slow start to this year. Note too that the unemployment rate edged up from 4.3% to 4.4% in the three months to December,” writes Paul Hollingsworth, a senior UK economist at Capital Economics, in a recent note.

UK was revised downward for the fourth quarter, from 0.5% to 0.4% growth, while third quarter GDP growth was revised higher to 0.5%. This turned the trend negative and left economists of the view that momentum was ebbing from the economy.

Unemployment data also appear to have given off mixed messages, at first glance, although figures released this week put concerns about the jobs market to rest once and for all.

The unemployment rate had risen 10 basis points to 4.4% in the final quarter of 2017 even though employment growth was still strong, with the move due largely to a rise in the so called participation rate.

Unemployment subsequently fell back to a 42 year low of 4.3% in the three months to January, despite a continued rise in the participation rate, as the economy created 168,000 new jobs during that period. This was twice the number of new jobs expected by even the most bullish forecasters.

“This tightening in the labour market appears to be feeding through to higher pay, with annual growth in headline (three-month average) earnings growth rising from 2.7% to 2.8% – its highest level since September 2015,” notes Peach.

Taken together, the last two months of data have shown the UK labour market in rude health, while signs that wages are rising have led markets to bet the Bank of England will soon raise interest rates again. The BoE will announce its latest interest rate decision at 12:00pm Thursday.

Moreover, if the recent rise in wages and February’s fall in inflation continue as a trend, then real incomes will soon be growing again because pay growth will be above the rate of inflation. Inflation fell from 3% to 2.7% in February and most economists say it will continue declining in 201. Wages grew at an annualised pace of 2.7% in the three months to January.

This would have positive implications for growth at a time when the economy is already set to receive a dividend from lower levels of inflation, which will ease some of the pressure on “real GDP” growth. Nominal GDP grew by 3.8% in 2017, which is just 10 basis points below the 3.9% growth seen in 2016 and a full percentage point higher than the 2.8% GDP growth seen in 2015.

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