UK retail sales surge in January

The UK posted a surging set of retail sales numbers this morning, raising hopes that, after yesterday’s confirmation that the economy ended 2023 in recession, economic growth may already be inching back into positive territory. The headline figure for the volume of goods sold in stores in January rose by a huge 3.4%, the biggest reading since April 2021, and which left year-on-year growth rising by 0.7%, a considerable improvement on the -2.4% reading for December. With the cost-of-living crisis now starting to ease and wages growing in real terms, the report suggests that rising consumer confidence is finally encouraging consumers to increase spending once again. Encouragingly, the data also shows that sales rose in all categories reported except clothing, suggesting the recovery is broad based and therefore more likely to be sustainable.

With domestic consumption responsible for around 60% of total expenditure in the UK, the weakness in spending last year was one of the main reasons for UK growth stalling in H2, as consumers succumbed to higher borrowing costs, falling real wages and an increasing tax burden. Today’s figures suggest they are entering 2024 with a renewed sense of optimism about their finances going forward. And with the expectation of lower interest rate and mortgage costs to come, plus promises of further tax cuts from the government in next month’s Budget, it all points to a consumer-led economic recovery that is potentially starting to take hold.

Importantly, looking ahead, the outlook for household disposable income looks bright. As CPI continues to fall, in part on the back of the UK energy price cap which is expected to continue falling this year, so real household disposable incomes will rise. Furthermore, the growth being seen in real wages, combined with a labour market that remains tight, should allow employees to start clawing back much of the erosion in real incomes suffered over the past couple of years. Coming at just the right time is the forthcoming general election, which is certain to see the tax burden reduced further in next month’s Budget as the government attempts to position itself in the most favourable light. And finally, expectations of lower interest rates this year and, concomitantly, lower mortgage rates, will steadily reduce the drag on spending from higher refinancing costs.

The potential party-spoiler is that today’s numbers, coming in the month immediately following Christmas and when spending is typically weaker as households look to pay-back the excess spending of the festive season, may cause the Bank of England (BoE) to think more carefully about the timing of any interest rate cuts. With CPI this week potentially showing signs of increasing ‘stickiness’, further tax cuts set to come, wages rising in real terms and consumers appearing willing to start spending again, some of the more hawkish members on the Monetary Policy Committee may be uneasy about the prudence of signalling any intention to cut interest rates just yet. With so many economic forces increasingly pulling in different directions, policy making for the BoE this year may yet turn out to be even more complicated than it was in 2023.