UK retail sales volumes maintain downtrend

Chris Scicluna
Emily Nicol

Japan inflation rises to highest since 2018 on the back of higher food prices
Today’s Japanese consumer price inflation figures for March broadly aligned with expectations. Prices rose a further 0.4%M/M to leave the headline CPI rate up 0.3ppt to 1.2%Y/Y, the highest since October 2018. This upwards shift principally reflected a further sizeable increase in food price inflation, up 0.6ppt to 3.4%Y/Y, the highest since 2016, with fresh food inflation up to 11.7%Y/Y as cabbage prices rose 37%Y/Y. So, when excluding fresh foods, the BoJ’s forecast measure of core inflation rose 0.2ppt to 0.8%Y/Y, the highest for almost three years.

Although the upwards drift in March was marginal, energy prices were still up a hefty 20.8%Y/Y, the most in four decades, to more than fully account for headline inflation. But while electricity and gas prices jumped further (up 1.8ppts to 21.6%Y/Y and 1.9ppts to 18.6%Y/Y respectively), gasoline prices eased back to leave the annual rate down 2.8ppts to 19.4%Y/Y, reflecting the government’s decision to raise the fuel subsidy last month.

Among other detail, household durable goods inflation was boosted (up 5.4ppts to 0.1%Y/Y, the first positive reading in six months) by a further jump in refrigerator prices (25%M/M). But clothing inflation eased back slightly (down 0.7ppt to 0.7%Y/Y) perhaps reflecting the timing of seasonal discounting due to the latest pandemic wave. And the largest downwards impulse continued to relate to the government’s policy initiative to cut mobile phone charges last April, which still subtracted 1.4ppts off headline inflation. So, when excluding food and energy, the internationally comparable measure of core inflation remained firmly in negative territory (-1.6%Y/Y). Of course, as the steep drop in mobile phone charges drop out of the annual calculation this month, we will see a substantial jump in all inflation measures in Japan in April, with the headline rate likely to be above 2%Y/Y for the first time since 2008.

Japanese flash PMIs suggest firms remain reluctant to pass on rising cost burdens, amid softer demand
But today’s flash PMI surveys suggested that services firms were still very reluctant to pass on rising input costs to consumers, with the respective output price PMI down 0.2pt to 50.1 in April despite the input price index having risen a further 3.2ppts to 60.9, the highest since 2008. Admittedly with price pressures more acute in the manufacturing sector, today’s survey suggested the fastest increase in output prices since the survey began in 2001. With respect to output, the manufacturing PMI slipped back this month, by 0.5pt to 51.7. And despite the relaxation of Covid-related restrictions, the services activity index was up just 1.1pt to 50.5. So, the composite PMI (up 0.6pt to 50.9) was merely consistent with only modest expansion at the start of Q2 following an anticipated contraction in Q1. And the decline in the new orders component by 1.1pts to 50.0 raises some questions about the pace of recovery momentum going forward too.

UK retail sales decline sharply as spending habits change amid increasing squeeze on household budgets
Given the increasing squeeze on UK household budgets and greater opportunities for consumers to spend on services since the relaxation of Covid-related restrictions, retail sales in March were always anticipated to have been weak. But today’s figures came in well below expectations, with the volume of retail sales down 1.4%M/M following a steeper than initially estimated decline in February (-0.5%M/M). So that left sales down 1%Q/Q in Q1, the largest quarterly drop for a year.

The largest negative contribution came from non-store retailing, which fell a further 7.9%M/M in March perhaps reflecting easing concerns about the pandemic and therefore a return to the High Street. But the rise in non-food store sales (1.3%M/M) suggested only minimal substitution between spending online and in store, suggesting that concerns about the cost of living crisis had led to a change in spending habits. Certainly, given the spike in petrol prices last month, today’s figures implied that non-essential road travel had been reduced, with fuel sales down 3.8%M/M. And food store sales also fell (-1.1%M/M) seemingly impacted by increased spending in pubs and restaurants, as well as rising prices.

Plunge in UK consumer confidence points to weakness in spending ahead
Looking ahead, the downtrend in sales volumes looks set to continue. Today’s GfK consumer confidence survey certainly offered an extremely downbeat assessment at the start of Q2. In particular, the headline sentiment index dropped sharply for a fourth successive month and by a larger-than-expected 7pts in April to -38. This left it 4pts lower than the initial pandemic trough, way below the long-run average (-9) and only just above the global financial crisis low (-39). Within the detail, every component was weaker in April, with the most marked deteriorations relating to households’ expectations for their financial situations over the coming twelve months, with the associated index down 8pts to -26, by far the weakest on the series, and the perceptions of the climate for making major purchases, which dropped to the worst since the start of the pandemic. So the outlook for private consumption in the UK looks very weak indeed. And so, we maintain our forecast of a contraction in UK GDP in Q2.

Flash PMIs to point to ongoing expansion in Europe and US despite ongoing supply bottlenecks
Today will also bring the flash April PMIs from the euro area, Germany, France, UK and US. In contrast to yesterday’s better French INSEE survey results, the euro area indices might well suggest a further deterioration in manufacturing conditions at the start of Q2, particularly in Germany. The euro area manufacturing PMI is expected to fall 1.6pts, to 54.9 in April, the lowest in fifteen months, as supply constraints become increasingly binding. But with services likely to see a further boost from the reopening of the tourism sector, the decline in the euro area’s composite PMI is expected to prove modest and remain consistent with ongoing expansion. Likewise, the preliminary UK PMIs are expected to imply another solid month of services to offset some softening of manufacturing output amid supply-chain disruption and a further increase in cost burdens. In the US, meanwhile, the composite output PMI is forecast to edged very slightly higher to 57.9, which would mark the strongest reading since July.

Elsewhere, President Lagarde will give a keynote speech at the Peterson Institute’s Macro event, while BoE Governor Bailey is due to participate in an IMF panel on Inflation dynamics in a fragile global economy.

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