UK retail sales disappoint in November

Chris Scicluna
Emily Nicol

Flash euro area PMIs to point to contraction at the end of Q4 despite modest improvement in the German data while the French survey disappoints
Focus in the euro area this morning is on the December flash PMIs. While the euro area composite PMI ticked up in November, at 47.8 it remained firmly consistent with contraction, with the services index the weakest since mid-2013 outside of Covid lockdown periods. But the German survey for December, just released, suggested a stabilisation in conditions towards year-end, with the composite PMI up 2.6pts to a six-month high of 48.9. The improvement in Germany was broad-based, with the services activity index up almost 3pts to a five-month high of 49.0, and the manufacturing output index up more than 2pts to a six-month high of 48.7. Within the other detail, firms in both sectors remain downbeat about the outlook for the coming twelve months, but not quite so much as last month.

In contrast, the French survey fell short of expectations, with the services activity PMI falling for a third consecutive month in December, by 1.2pts to 48.1, the lowest since February 2021. So while the manufacturing survey signalled a slightly softer pace of decline – the output component rose 2.1pts to 47.7 – the composite PMI fell 0.7pt to 48.0, similarly the weakest since early 2021 and consistent with contraction. We note, however, that the PMIs typically provide a less accurate guide to the French economy than other national surveys including yesterday’s INSEE indices.

UK retail sales fall in November to be on track for 6th successive quarterly drop in Q4
Contrary to the expected rise, UK retail sales volumes fell 0.4%M/M in November with no obvious support from Black Friday events. Growth in October was revised up by 0.3ppt to 0.9%M/M, suggesting that the rebound following the holiday for the Queen’s funeral was a touch stronger than previously thought. But sales volumes were still down 2.2%3M/3M, the most on that basis in more than a year. And the average level in the first two months of Q4 was 0.9% below the Q3 average, strongly suggesting that retail sales will fall in Q4 for the sixth successive quarter. Indeed, sales volumes in November were down a steep 5.9%Y/Y to a level almost 9½% the pandemic peak in April last year and 0.7% below the pre-pandemic level in February 2020. And December’s sales volumes seem highly likely to have fallen by much more than in November due to the past week’s disruption from snow and rail strikes. So, we now expect retail sales to drop 1½%Q/Q or more this quarter.

Within the detail of the November figures, the volume of sales of auto fuel fell 1.8%M/M, but excluding them sales volumes were still down 0.3%M/M. Sales from clothes and textile stores were up for a third successive month to be trending almost 3% above the Q3 level, with consumers spending seemingly spending more as those retailers eschewed their usual November price hikes. In contrast, while food sales volumes were up 0.9%M/M, they were trending firmly below the Q3 average, as were sales at household goods stores, a strong reflection of high rates of inflation in those sub-sectors. Indeed, given price increases, the total value of retail sales was up 0.7%M/M in November to be up 3.6%Y/Y and 14.1% above the pre-pandemic level in February 2020.

UK consumer confidence firms to 5-month high, but remains historically low amid ongoing erosion of real disposable incomes
The weakness in retail sales is hardly a surprise given the severe drop in per capita real household disposable income, estimated by the OBR to decline 4.3% in the current fiscal year, the largest fall since records began more than six decades ago. So, consumer confidence has been at a historically low level too. Nevertheless, according to today’s GfK survey, consumer confidence managed to rise for the third successive month in December to a five-month high. That, however, still left confidence below the worst levels recorded during the pandemic lockdowns and the global financial crisis. But the climate for making major purchases was judged to be the least bad since March, as were expectations for the economic outlook over the coming twelve months, perhaps benefiting from the decline mortgage rates from the highs reached in the aftermath of the autumn Truss gilt-market crisis. We note, however, that real disposable incomes are set to decline sharply again in FY23/4, probably more than 2½%Y/Y, and so we expect retail sales and overall consumer spending to continue to decline next year too.

Despite boost to services, Japan’s composite PMI consistent with stagnation in December
Japan’s flash PMIs signalled a welcome improvement in the services sector in December as firms continued to benefit from a boost to tourism and domestic demand was supported by the government’s discounted travel scheme. In particular, the services activity index rose 1.4pt to 51.7, to leave the quarterly index up a little more than 1pt. And this allowed firms to pass on some their additional cost burdens to consumers, with selling prices reportedly rising at the fastest pace since October 2019. But firms were less upbeat about the near term outlook, with optimism about the year ahead declining to its lowest for nine months. And conditions in the manufacturing sector remained even more challenging, with the output PMI (46.4) consistent with ongoing contraction despite a modest increase on the month. Overall, the composite PMI rose 1.1pt in December to 50.0, a level merely implying stagnation at the end of the year, to leave the quarterly average (50.2) unchanged from Q3 when GDP declined 0.2%Q/Q.

UK flash PMIs to remain in contractionary territory in December
The flash UK December PMIs will also be published today and seem bound to remain consistent with ongoing contraction. The composite index was unchanged last month at the 22-month low of 48.2, with the detail suggesting that manufacturing and services activity are both likely contracting. In addition, the BoE is due to announce its bond sales plan for Q123, which will be based on a decision taken by the BoE Executive rather than the MPC. Most notably, we expect the Bank to confirm the start of sales of long-dated Gilts from the APP portfolio.

Final euro area inflation figures likely to confirm a drop in the headline HICP rate
Attention later this morning will turn to final euro area consumer price inflation figures for November. Equivalent figures from Germany (11.3%Y/Y) and France (7.1%Y/Y) were unrevised, while there was a modest downwards revision in Spain (by 0.1ppt to 6.7%Y/Y). As such, we expect the euro area headline inflation rate to be confirmed at 10.0%Y/Y, down 0.4%ppt from October's series high. Core euro area inflation, however, remained steady at the series high of 5.0%Y/Y. Of course, the full detailed breakdown will be of interest, allowing calculation of trimmed means, for further insight into underlying price pressures.

US flash PMIs likely to point to contraction in Q4
Like the other major economies, the US data flow today will feature the December flash PMIs. In November, the services PMI fell sharply to just 46.2, the lowest since May 2020 and implying a steep decline in activity. And with the manufacturing output PMI (47.5) also well below the key-50 expansion level, the composite PMI (46.4) was consistent with a marked contraction in November. Admittedly, this assessment contrasted markedly with the more widely watched ISM surveys, with the non-manufacturing index having risen more than 2pts in November to 56.5.

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