London - UK Chancellor of
the Exchequer
Philip Hammond told a Davos gathering on Friday that an inflation pickup
will put a damper on consumers this year. The first signs may already
be appearing.
Less than an hour
before Hammond spoke, data showed
retail sales fell at the fastest pace in almost five years in December,
recording a 1.9% drop that far exceeded even the most pessimistic
forecasts in a Bloomberg survey.
Possible explanations include
price increases and consumers scaling back purchases after taking
advantage of Black Friday discounts the previous month. Mild weather
also probably affected clothing sales - down 3.7% on the month
- though the weakness in the sector was broad-based, with turnover at
food, household goods and department stores all falling.
The decline could be a portent of 2017, with the pound’s
17% drop since the June vote to leave the European Union boosting
import costs and fueling a sharp upturn of inflation. That means
consumers, who have weathered the Brexit vote so far, now face a squeeze
that will eat into real incomes. That could potentially hurt growth in
an economy that relies heavily on their enthusiasm for spending.
While the slowdown in 2017 may not be as sharp as initially expected,
cooler growth is predicted. Both the Office for Budget Responsibility
and the Bank of England
forecast expansion of 1.4% this year, down from just above 2% in 2016. Hammond said a weaker consumer is partly behind that
view.
“The currency depreciation is now feeding through into inflation
which will increasingly affect consumer behavior during this year,” he
said at the
World Economic Forum Annual meeting. “Hence the lower forecast for
economic growth in 2017 as that inflation effect takes place.”
The price of retail goods sold in December, as measured by the
deflator, increased on an annual basis by 0.9%, the most in three
years. Consumer-price inflation jumped to 1.6%, according to a
report earlier this week, and is forecast to keep climbing through 2017.
While most surveys see it around 3% by the end of the year, some
expect a figure closer to 4%.
“This is likely to be the theme for the rest of the year - higher
prices will reduce disposable income and hurt consumer spending growth,”
said
Alan Clarke, an economist at Scotiabank.
The fourth quarter as a whole saw retail sales rise 1.2%,
meaning the sector made a 0.1 percentage point contribution to gross
domestic product. Still, growth was weaker than the 1.8% pace
recorded in the third quarter. In December, sales rose an annual 4.3%, compared with a peak of 7.2% as recently as October.
“We suspect that retail sales growth will soften in 2017,” said
James Knightley, an economist at ING in London. “Consumer confidence is
weakening and employment growth has stalled while real household
disposable incomes are being eroded by higher prices. At the same time
retailers themselves are going to see profit margins squeezed by higher
import costs.”
Read Fin24's top stories trending on Twitter: