Like a coiled spring, the UK’s economy is bouncing back.
The easing of government restrictions has seen the latest retail sales accelerate in April, showing a whopping monthly increase of 9.2%. Retail sales are one of the best and earliest indicators of consumer health. The increase, at almost double the 4.8% consensus forecast, is extremely encouraging.
Digging into the details, non-food stores, particularly clothing, were the largest beneficiaries of household spending. The freedom to take to the High Street is evident from the drop in the percentage of online sales, which fell from 34.7% to 30% of total sales over the month. This short term reversal was something we discussed in our article ‘E-Commerce’s Accelerated Pandemic Growth’. https://www.tpllp.com/e-commerces-accelerated-pandemic-growth/
Chart 1: UK Retail Sales Volume
Source: Factset, May 2021
As we enter the summer months, and with consumers more active, UK businesses are looking to match increased consumer demand with more staff. For those unfortunate to be made redundant because of the pandemic this is welcome news. Last week’s labour-market data showed a fall in unemployment from 4.9% to 4.8% and employment statistics from HMRC show similar improvements.
Increased demand for workers should in theory support higher wages. There is some evidence for this happening already with average weekly earnings (excluding bonuses) on a rolling basis having risen again, from 4.4% to 4.6% for the three months to March. That said, we would resist temptation to draw firm conclusions about wage growth continuing apace at this stage. The current high rate looks like it is being affected by the ‘composition effect’. This can occur when the average wage increase is temporarily distorted by low-paid workers previously laid off not being rehired as quickly; thus, missing from the calculation. With better paid workers being hired ahead of low paid ones this may be why average wages are trending higher right now. This is still good news for the economy because higher aggregate levels of disposable income help facilitate consumption of goods and services.
Looking ahead, the notion that pent-up demand from surplus savings will be unleashed now looks to be correct. The recovery in retail sales and greater economic activity following the easing of restrictions shows this is underway. However, for robust demand to continue, consumer confidence must remain resolute. Thankfully in this regard there are grounds for optimism.
Chart 2 below illustrates that consumer confidence (blue line) has started to recover, supported by more disposable income extracted from savings (the purple bars highlight the percentage of disposable income saved rather than consumed). As we now know savings rates rocketed last year, hitting an all-time high of 25.9% back in April 2020 when lockdown measures were at their strictest. However, savings have started to drop as people start to spend more. This is shown by the bars in the chart, which also indicate that savings remain well above the 30-year average of 9%. To put a number on this the amount saved equates to a sum of £145bn. This is equivalent to 6.9% of all goods and services consumed in the UK as measured by gross domestic product (GDP).
Chart 2:
Source: Office for National Statistics and FactSet, May 2021
So, what lies ahead?
It is reasonable to suggest that consumer confidence will remain in a good place and pent-up demand from elevated savings will support above trend spending for the foreseeable future.
There is no escaping the fact that confidence to spend is linked to the success of the vaccine programme. This has allowed easing of restrictions, improved labour market conditions and the prospect of improvements in income levels. As far as growth in the economy is concerned it looks well underpinned. The National Institute for Economic and Social Affairs forecast GDP growth of 5.7% for 2021 based on savings rates alone returning to normal levels.
Where cash will be splashed is an interesting topic. The High Street is one area feeling the benefit, but spending will broaden out to include hospitality and travel as we head into the summer months. The British weather is doing its best to dampen spirits, but UK citizens rise above such challenges. Reopening of pubs and restaurants will we believe help cultivate an upbeat mood. And if the weather does not improve, foreign holidays are becoming possible again. Yet another feature of life getting back to normal.
Our glass is always half full!
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