June/July 2021

Spend, Spend, Spend… the Shoppers are back!

Analysis from Dr John Ashcroft on the economic impact of Covid-19
Retail sales jumped by almost 10% in April. Masked shoppers returned to the high street. Sales were up 40% compared to April last year. Sales were up by 12% compared to pre-pandemic levels in the months of 2019. Clothing stores were major beneficiaries. Sales volumes increased by 70% compared to the prior month. Household goods sales jumped 10%. Furniture sales were up by 30%. Sales of cosmetics were up by 25%. DIY and garden centre sales were down. Shoppers had other things on their mind as the high street moved back into business. Salvation for the high street? More of a respite perhaps. Online sales increased by 32% year on year. Clothing sales were up by over 80% year on year. Household goods sales were up by almost 30%. As a proportion of all retail sales, online slipped to 30% of all retail. This was in line with our 30% forecast for the second quarter, as more options open for retail traffic.

Fastest output growth for twenty years…
Business activity is expanding at the fastest rate since records began according to the latest PMI data compiled by IHS Markit and CIPS. The composite output index increased to 62.0 compared to 60.7 last month. The manufacturing index increased to 63.2. The service sector index increased to 61.8. This all bodes well for a strong recovery this year. Chris Williamson, Chief Business Economist at IHS Markit, said “The UK is enjoying an unprecedented growth spurt as the economy reopens. Factory orders are surging at a record pace as global demand continues to revive. The service sector is reporting near record growth as the opening up of the economy allows more businesses to trade. Business confidence has hit an all time high as concerns about the impact of the pandemic continue to fade.”

Growth expectations rise for the year…
Growth expectations have been revised up according to the latest forecasts for the UK economy published by HM Treasury this month. The average forecast for GDP growth is now 6.4% compared to 5.3% last month. The American banks lead the pack. Goldman Sachs forecast growth of 8.1%. JP Morgan forecast growth of 7.9%. The Bank of England now expects growth of 7.25% in 2021. For the moment economists appear to be pretty relaxed about the prospects for inflation. CPI inflation is expected to average 2.2% in the final quarter and through most of the following year. We think that may be a tad optimistic. We expect inflation to hit the 3% CPI basis and soon.

So what of spending?
The Chancellor has urged households to get out and spend. “Go have fun and spend money”. People should “do their bit” by spending savings they had built up during the lockdown, said Rishi Sunak. The Chancellor believes there are a lot of excess savings, which could be a stimulus to growth. The Office For Budget Responsibility suggested in March, households have accumulated £180 billion in forced savings over the past year or more. Household spending fell by £136 billion last year, incomes increased by £15 billion. The effective nominal savings were £150 billion over the twelve month period. Add in a further quarter of lockdown in 2021, and the quantum of “savings” increases to over £180 billion. Expenditure has been curtailed by restrictions in “opportunities to spend”. Incomes were supported by the relatively low increase in unemployment, an increase in universal credit claims and the introduction of the furlough scheme. Without Treasury intervention, the household loss would have been 9% of total incomes. Households have been accumulating savings and cutting back borrowing. We estimate some £25 billion of repayments have been made on credit cards and other loans since March last year, using Bank of England data. The OBR is forecasting a “strong recovery in consumption in its central forecast over the second half of 2021, primarily a direct consequence of the re-opening of the economy as restrictions are relaxed.”

Our TSE forecasts suggest household spending will increase by 7.9% this year and 7.4% in 2022. This is consistent with our forecasts of 6% plus real GDP growth. Spending could be higher. We disaggregate the forecast into major spending categories. Major beneficiaries will be restaurants and hotels, up 42%, clothing up 32%, net tourism up 88% and transport up 15%. So what could go wrong? Shoppers may experience higher prices in the process as businesses try to recovery lost profits. Prices are increasing as a result of higher shipping and transport costs. Limited occupancy levels are pushing up operating costs. For the moment, the shops are open, the crowds are back on the streets, confidence is high, consumers have the money and they are ready to spend.

Dr John Ashcroft specialises in economics, strategy and financial markets. He is author of The Saturday Economist, great updates every week on the UK and World Economy. The Saturday Economist Live is now available as a podcast and on Zoom. “Fast Moving, Content Rich and Fun.” Find out more… www.thesaturdayeconomist.com