According to the latest GfK NOP survey, consumer confidence slumped in January as households worried about economic prospects for the year ahead. Household spending will be under pressure in 2011 as real incomes fall and discretionary income will be further squeezed by the January VAT increase.
The climate for major purchases according to the survey, took a big hit, a clear indication that spending on big ticket items, particularly “household related” big ticket items will take a dive this year. According to the BDO High Street Sales Tracker trading conditions were more difficult last week reflecting reduced levels of discounting and slow demand in many categories. Overall, like-for-likes dropped for the first time this year (-0.9%) with only a handful of stores posting healthy gains.
It was also a quieter week for John Lewis with sales up by just 1% over the last two weeks. Given that on line sales were some 12% higher, the bricks and mortar sites struggled to hold ground.
Sentiment cannot have been encouraged by a morale shattering speech from the Governor of the Bank of England on Tuesday. The Governor was was in Newcastle where the mood is a little circumspect at the best of times. Opening remarks included quotations from Tolstoy and Ken Dodd, all very strange.
“As Tolstoy might have said” he began, “all happy economies are alike, each unhappy economy is unhappy in its own way”. He then went on to explain the reasons why the the UK economy (and the Bank of England presumably) is an unhappy place.
Inflation is above forecast but for three main reasons, imported prices, (exacerbated by sterling weakness), oil / energy prices and VAT changes. All outside of the Bank of England control and beyond the scope of the Bank of England Model presumably.
As a result of inflation and low earnings, real wages will be no higher than in 2005 and “one has to go back to the 1920’s when real wages fell over a period of six years.” said the Governor. As Tolstoy or Macmillan may have said “you’ve never had it so bad”. It certainly didn’t sound good.
The Bank of England still believes inflation will fall to target as the soup kitchens undermine retail food prices. The model still believes the economy is rebalancing towards net exports and away from consumption. This despite the fact that the net deficit on goods continued to increase quarter on quarter in 2010 as imports increase faster than exports.
It will be a challenging year for the economy. Our forecasts for the year ahead will be updated in the February Economics review. The January presentation is here. JKA
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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias.