Research article

Economic and Consumer Outlook

The combination of a recovering housing market and strong consumer confidence bodes well for Christmas and New Year trading.

As retailers become increasingly focused on the crucial Christmas trading period, it is looking likely that sales will be stronger this year than last.

The GfK consumer confidence indicator has averaged +4.5 over the last six months, compared to a long-run average of -8. Inflationary pressures are almost non-existent still, despite strong pay growth. Indeed, the latest ONS data on pay shows that wages rose by 3.2% in the year to July, the strongest growth since November 2008.

After sustained period of falling real wages it looks likely that the consumer could enjoy this level of wage growth for some time to come. The ratio between unemployment and job vacancies is back to pre-crisis levels, and this is likely to stimulate further wage rises in the year to come.

However, the recent data on retail sales has been weaker than expected. This probably has a lot to do with the fall in food sales, attributed by several retailers to bad weather and a rise in the number of people going away on holiday. Also, the fact that the late August Bank Holiday fell outside the period covered by the latest retail sales data may be of relevance. We expect that the September data will show a marked recovery in retail sales growth.

Looking slightly further ahead the latest comments by MPC members indicate that the first hike in the UK base rate is still some way off, and this also bodes well for a strong Christmas.

A final metric that is particularly relevant to parts of the retail warehouse market is the state of the housing market. While house price growth slowed around the election period, there are signs that the rate of growth has picked up a bit over the summer. Housing transactions, which are often a good leading indicator for sales of bulky goods in particular, have recovered from their cyclical lows, but as the chart below shows they are still far off the pre-crisis levels.

Figure 1

FIGURE 1UK housing transactions

Source: HMRC, CML

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