What does increased consumer spending really mean for the UK?

On the surface, increased retail spending is pretty positive as it indicates general confidence among consumers and a healthy services sector.

The services sector is responsible for over 70 per cent of total GDP and has been powering the UK since the global economic crisis in 2008. 

Robust retail sales are a crucial part of services strength, so today’s news was encouraging from that perspective.

Sales excluding auto fuels had been expected to increase by 1.0 per cent on the month in April following a -1.2 per cent dip in March. 

However, sales actually surged by 2.0 per cent on the month. 

This outperformance was mirrored in the annual result, with year-on-year retail sales printing at 4.5 per cent instead of the forecast 2.6 per cent.

Retail sales including auto fuel were up 2.3 per cent on the month and 4.0 per cent on the year – again beating respective forecasts of 1.1 per cent and 2.2 per cent.

This surprisingly upbeat set of sales figures was particularly cheering in light of recent concerns about accelerating inflation and stagnant wage growth.

UK inflation has been rising fairly dramatically in recent months, with the annual inflation rate coming in at a three-and-a-half year high of 2.7 per cent on the year in April.

The surge in price pressures is largely to do with the depreciation in pound exchange rates recorded in the months following the UK’s decision to Brexit from the European Union.

Inflation is now running above the Bank of England’s (BoE) target of 2 per cent and is significantly outstripping the pace of wage growth. 

There are predictions that the inflation rate could hit or even exceed 3 per cent by the end of the year.

Yesterday’s average earnings report revealed that wages grew by 2.4 per cent in the three months through March, only a very slight improvement on the previous rate of 2.3 per cent. 

Growth in earnings excluding bonuses actually fell in the same period, dipping from 2.2 per cent to 2.1 per cent.

With wages failing to keep pace with the climbing prices of goods and services, there are serious concerns that consumer purchasing power will be hamstrung in the months ahead.

If that proves to be the case and the UK’s services sector struggles as 2017 continues, domestic growth could fall sharply.

So while today’s retail sales figures were upbeat, the consumer spending reports published over the next few months could paint quite a different picture.

The news did have a positive impact on the pound however, with the currency managing to recover from its recent 5-week low against the euro and GBP/USD pushing above $1.30.