Economy in Brief

Retail sales in January rose 3.9% after falling 3.7% in December and rising in November. The sequential pattern of nominal growth rates shows a pickup from 3.8% over 12-months to 4.4% over 6-months to 4.9% over 3-months.

During a period when inflation has been on the move changes in nominal retail sales are not the best indicator of what's going on with sales volumes. However, real retail sales (sales volumes) in the UK show a pickup with real sales volumes up 0.7% over 12-months, at a 1.7% annual rate over six-months, and surging at a 5.9% annual rate over three-months. Retail sales volumes show real sales in January rose by 3.4% after falling 3.3% in December and rising in November- the same general pattern as for nominal sales.

Passenger car registrations have fallen for three months in a row, and they show gathering weakness. Registrations are up by 7.5% over 12-months but they're falling at a 4.7% annual rate over six-months, and at a 17.1% annual rate over three-months. This is an important category for retail spending; automobile registrations are weakening and weakening more seriously.

Surveys on retail sales are mixed in their message. The Confederation of British Industry (CBI) looks at retail sales for the time of year and finds conditions worsening in recent months with a change in assessment of -6 in November turning to -9 in December and to -22 in January. That same CBI survey shows a reading change of -44 over 12 months -46 over 6-months and -37 over 3-months. All of these are net negative numbers and are simple changes unadjusted for the length of the time span. It is consistent deterioration.

The CBI survey also offers a survey on the volume of orders looking at year-over-year changes. The year-over-year pattern monthly is irregular with a + 15 in November a - 32 in December and a + 18 in January. Over 12 months CBI order volumes year-over-year register a drop of -4 over 6-months, an increase of +3, and over three-months a change of plus one. The plus one reading shows erosion in upward momentum compared to +3 over 6 months but it's still a positive reading.

The GFK reading on consumer confidence is a +3 in January from +2 in December, but both of those gains are lower than the +6 reading for November. Sequentially consumer confidence has slowed its gains slightly with a +26 reading over 12-months compared to readings of +11 over 6 months. The +11 ga over three months would be quite strong if it kept up for 12-months; then it would trump the +26 gain, logged over 12-months.

The table also chronicles the growth rate for the CPIH. There we see that the inflation rate for 12 months six months to three months has gradually been coming down, which is a good development.

Quarter to date (QTD) statistics are relatively ephemeral at this stage since we're looking only at January compared to the fourth quarter average. On that basis nominal sales are up strongly at a 10.4% annual rate, real sales are up at a 9.9% annual rate, passenger car registrations are falling at a nearly 20% annual rate. The survey data from the CBI shows retail sales for the time of year weaker with a -30 drop, although the volume of orders is higher and GfK consumer confidence improves.

The far-right hand column evaluates the growth of the Year-over-year percentage changes for ordinary retail sales data versus ranking on the index levels for the surveys. These show a middling 55.6 percentile standing for sales growth, although for the volume of sales, conditions appear much weaker with the real sales increase at only a 33-percentile standing in the bottom 1/3 of its historic range of values. The pace for passenger car registrations the year-over-year reading still has a nearly 72-percentile standing, but shorter terms growth rates show that is being undercut. The CBI assessment of sales for time of year is a very weak 1.6 percentile standing, the volume of orders year over year has an 8.6 percentile standing, and consumer confidence reading has a 35-percentile standing. All the surveys show weak conditions. These are conditions that are very weak in comparison with historic norms.

Summing up UK economy has been struggling. The recent GDP figure showed the 2nd decline in a row for real GDP conditions in the retail sector. Retail sales are somewhat mixed with current spending holding up better than expected but the more forward-looking gauges from the CBI and the relative position of consumer confidence would indicate caution in interpreting those events. Retail sales have had a pickup recently, but year-over-year growth is still modest and survey data on merchant plans is weak...

A rule of thumb recession signal? I am generally not impressed with the signal of two declines in a row for GDP as an indicator for recession. News reports today are heralding the triggering of a ' technical recession’ signal for the UK, I will once again make the point that two negative quarters of GDP growth in a row is hardly a signal that is ‘technical’ this is a ‘rule of thumb’ judgement that is being rendered.

A rule of thumb signal, but trouble nonetheless The signal and the conclusion of recession based on this quirky measure mostly gives market participants a very quick and dirty way to assess what the economy is doing and how severe its circumstance might be. In this case, however, the depth of the GDP decline appears to be a little bit more severe than we have seen in other countries. The breadth of the declines across GDP categories suggests that this is something more serious than just the observation of two quarterly declines in GDP in a row. The UK economy appears to be in more serious trouble.

One of the first things to notice in the GDP table above is that while GDP has declined for two quarters in a row, it has logged the more severe, 1.4% drop at an annual rate, in the fourth quarter and the more modest -0.5% at an annual rate in the third quarter. Still, domestic demand grew by 1.2% in the fourth quarter after falling by 1.9% in the third quarter, domestic demand is somewhat weak but also choppy and unstable. Yet it is showing some resilience despite the overarching decline in GDP.

Year-on-year weakness, too However, in the lower panel of this table, we also see that this two-quarter decline in GDP, combined with previous quarterly weakness, generates a year-over-year decline in GDP and that makes the two quarter in a row decline a more serious event. In addition to GDP weakness, housing investment is falling year-over-year, exports and imports are both falling. Although, once again, as a counterpoint. domestic demand is rising by 3.1% year-over-year after another solid year-on-year gain in Q3 that began a recovery after a previous period of year-on-yar demand declines.

Weakening production One additional thing that I explore when I see weakness like this, is industrial production. On the industrial production front, we find even more weakness with fourth-quarter growth in the UK and manufacturing falling at a 3.6% annual rate: that's a relatively stepped-up pace of decline. In fact, consumer durables output is falling by 4% at an annual rate, intermediate goods output is falling at an 8.6% annual rate and Capital goods output is falling at a 3.7% annual rate. All of this adds to the notion of the economy weakening severely and broadly and with GDP also lower on balance over one-year this weakness assessment seems to go over the duration hurdle as well.

What makes weakness a recession? The three-metrics we look for to assess recession are (1) the depth of weakness, (2) the breadth of weakness, and (3) the duration of weakness. UK GDP falls quarter-to-quarter at the faster pace of 1.4% annualized in the current quarter. Is weakness gathering momentum? And, while industrial production in Manufacturing falls at an annualized pace of 3.6% in Q4, IP rises by 2.3% year-on-year in December. Still, other GDP components are considerably weak, as housing investment falls by 9% year-on-year, exports drop 10.3%, imports, which are linked to international competition as well as to domestic demand, fall by 2% year-on-year. Clearly domestic demand has helped imports to grow (and domestic demand is a clear positive for the economy, even though in the GDP framework an import rise subtracts from GDP). Exports are a drag on GDP as they fall; their weakness is a clear signal that the international sector is not helping the UK economy at all.

A profile of weakness The UK economy on profile is weaker that the Euro-Area where GDP is simply crawling at a slow-flat pace. The US is a marked contrast showing robust growth and acceleration.

The good news is that UK inflation is falling and that the core rate is on top of the Bank of England’s target over 3-months; the six-month inflation pace is falling sharply, but the targeted 12-month pace is still sticker and well above the target.

Consumer Confidence (GFK) has stabilized and even strengthened but it is still weak and retail sales volumes are weakening.

The overarching view is weak The UK eco-data, not just the GDP report, paint a picture of an economy in decline hinting at several kinds of stresses – but several key stresses are missing too. The pound sterling has remained firm-to-strong on a real effective exchange rate basis. That adds to confidence, but it does not assist in generating growth through exports. Various CBI surveys show a weakening economy. Surprisingly, the UK PMI surveys for manufacturing and services have been strengthening. The cyclically sensitive passenger car sector has been relatively steady, and the UK job market has been ‘resilient.’ When recessions hit the job market that is when the fur really begins to fly and various knock-on effects spread. Moreover, the financial sector is still stable.

Fine until it’s not… Of course, in recession, everything can be simply fine until it isn’t. The analogy that it is a little like a dam bursting is illustrative. Before it breaks, everything is fine, some may have had a premonition and may have taken action. Then, suddenly it isn’t OK. When the dam breaks, various things are set in motion and those on high ground may be protected – if it is high enough. Who is protected in a recession is always hard to say; it depends on the kind of recession, and its severity and the speed of its onset. The Covid recession, for example, was an extreme event, very sharp, very broad...and very short. But the aftermath of the recession is also a period of ongoing disruption in which repairs are being made. Normalcy does not instantly set in when recession ends. Some recoveries are still painful. For now, The UK economy is showing some unraveling, but it is also still at a measured pace. This could be an inflection point where things either get worse or where this is the worst of it, and conditions settle down. The stable jobs market and stable financial sector are points in favor of this remaining a tempest, that only modestly spills out of the tea pot. But the UK is clearly in a zone where there is merit to close-watching. The Conference Board LEI for the UK has weakened sharply and that also bears watching, however, internationally LEI signals have not been having their finest hour.