Could 2017 turn out to be less of a 'black run' slowdown for retailers?

Thu, Jan 19, 2017

Source: Office for National Statistics

The UK jobs market figures for November contain some slightly more reassuring news for retailers after pre-Christmas warnings of Brexit-related doom and gloom. Firstly they show that, far from slowing under the impact of Brexit uncertainty, as forecast by many commentators, average total pay growth is actually accelerating, rising to 2.8% a year, while unemployment was down by 52,000 on the previous quarter. Taking into account the growth in hours worked over the last year, this points to a rather healthy growth in total earnings from employment in the fourth quarter of 4.3%. Government tax revenues and other factors like pensions point towards net income growth of 3.1%.

Meanwhile, unemployment, expected by many to grow, is instead actually static or falling, which also means more confident households with a greater willingness to borrow and spend. The implication is that 2017's consumer slowdown, rather than looking like the steep, twisting, downward slope of a "black run", 2017 is taking on more of a reddish tinge of a gentler, less hair-raising decline.

Of course there remains the unknown of how quickly and to what extent import cost driven inflation will feed through to consumer prices. December's CPI figure of 1.6% was driven mainly by air fares, petrol and by food. The success of retailers' negotiations now over deals with their suppliers covering future periods when their currency hedges run out will be crucial in determining inflation's future course. Mr Kipling manufacturer Premier Foods' profit warning suggests that suppliers may be coming off rather worse than the retailers in this process, hinting that inflation feed-through to consumers may be more moderate than some forecasts.

Overall the message is that so far the jobs market is holding up, or even tightening, leading to growing wages, increasing ahead of inflation. This is supportive to a range of retailers dependent on working age households, particularly the less financially secure 30-49s and under-30s, including Primark, Next, Asda and Tesco. It means that 2017's squeeze will be just a touch less intense for them relative to their older-focused peers. So while the consumer storm clouds may not have lifted, they're starting to look less threatening than they were before the new year.


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