Evelyn Reynolds

U.K. retail sales rebounded by 3.4% after a grim December, according to the Office for National Statistics, the strongest monthly gain since April 2021.
The “strong pick up in sales suggests the worst is now behind the retail sector and falling inflation and rising wages in 2024 will provide a strong platform for recovery,” Joe Maher, assistant economist at Capital Economics, said in a note.

A general view of a kiosk near Charing Cross station in London, England, on January 20, 2024. (Photo by Alberto Pezzali/NurPhoto via Getty Images)
Nurphoto | Nurphoto | Getty Images

LONDON — Stronger-than-expected January retail sales provided a glimmer of light for the struggling British economy on Friday — and suggest that the country’s recession will be short-lived, according to some economists.
Sales rebounded by 3.4% from December, according to the Office for National Statistics, the strongest monthly gain since April 2021. Economists polled by Reuters had expected a more modest growth of 1.5%.

Sales volumes increased in all areas except closing, as food shops saw the biggest boost. Consumers “spent more for less in January,” the ONS said, with the total they paid rising by 3.9%.
The latest figures follow the news of Thursday that the British economy entered a technical recession in the final quarter of 2023. Gross domestic product declined by 0.3%, following a 0.1% contraction in the third quarter.
Sales over the key holiday trading period were far weaker than expected, with December seeing the biggest monthly fal since January 2021.
British retail sales meanwhile remain 1.3% below their pre-pandemic level from February 2020, according to the ONS.
The “strong pick up in sales suggests the worst is now behind the retail sector and falling inflation and rising wages in 2024 will provide a strong platform for recovery,” Joe Maher, assistant economist at Capital Economics, said in a note.

The hike also points to a fading drag on consumer spending from higher interest rates, as well as the economy exiting recession territory, Maher said —but there is “still a long way back for retailers” to their pre-pandemic highs.
Kris Hamer, director of insight at the British Retail Consortium, said two months of higher sales volumes over the last three months were “promising” after 19 months of decline.
“Nonetheless, shoppers remained cautious as they entered the third year of the high cost of living,” Hamer said, adding that a rise in business rates and new border control costs would weigh on the retail sector.
Despite the poor growth figures, the retail report — along with steady inflation figures and a healthy December jobs report — ended the week on a “half positive note,” said Kallum Pickering, senior economist at Berenberg.
Anecdotal evidence from retailers suggests consumers held back in December, but came out in force to benefit from January sales, he said.
“However, we need to be cautious. Monthly data are volatile. The January jump merely offsets the big 3.3% [month-on-month drop in December – and hence returns real sales to the November level,” Pickering said in a note.
The fresh figures are consistent with “haphazard stagnation” in the retail sector and with broader economic activity in the last 18 months, though Berenberg economists expect retail momentum to pick up over the coming months due to higher real wages and consumer confidence, he added. More

Advance retail sales declined 0.8% for January, down from a 0.4% gain in December and worse than the estimate for a 0.3% drop.
Sales at building materials and garden stores were especially weak, sliding 4.1%. Miscellaneous store sales fell 3% and motor vehicle parts and retailers saw a 1.7% decrease.
Also, initial claims for unemployment insurance totaled 212,000 for the week ended Feb. 10, a decline of 8,000 from the previous week’s upwardly revised total and below the estimate for 220,000.

Consumer spending fell sharply in January, presenting a potential early danger sign for the economy, the Commerce Department reported Thursday.
Advance retail sales declined 0.8% for the month following a downwardly revised 0.4% gain in December, according to the Census Bureau. A decrease had been expected: Economists surveyed by Dow Jones were looking for a drop of 0.3%, in part to make up for seasonal distortions that probably boosted December’s number.

However, the pullback was considerably more than anticipated. Even excluding autos, sales dropped 0.6%, well below the estimate for a 0.2% gain.
The sales report is adjusted for seasonal factors but not for inflation, so the release showed spending lagging the pace of price increases. On a year-over-year basis, sales were up just 0.6%.
Headline inflation rose 0.3% in January and 0.4% when excluding food and energy prices, the Labor Department reported Tuesday. On a year-over-year basis, the two readings were 3.1% and 3.9%, respectively.
Sales at building materials and garden stores were especially weak, sliding 4.1%. Miscellaneous store sales fell 3% and motor vehicle parts and retailers saw a 1.7% decrease. Gas station sales also declined 1.7% as prices at the pump dropped during the month. On the upside, restaurants and bars reported an increase of 0.7%.
The control group of retail sales, which excludes items such as food service, autos, gas and building materials, fell 0.4%. The number feeds directly into the Commerce Department’s calculations for gross domestic product.

Consumer strength has been at the center of a U.S. growth picture that has proven far more durable than most policymakers and economists had expected. Spending accelerated by 2.8% in the fourth quarter of 2023, finishing out a year in which gross domestic product rose 2.5% despite widespread predictions for a recession.
However, worries linger that stubbornly high inflation could take its toll and jeopardize prospects going forward.
“It’s a weak report, but not a fundamental shift in consumer spending,” said Robert Frick, corporate economist for Navy Federal Credit Union. “December was high due to holiday shopping, and January saw drops in those spending categories, plus frigid weather plus an unfavorable seasonal adjustment. Consumer spending likely won’t be great this year, but with real wage gains and increasing employment it should be plenty to help keep the economy expanding.”
A separate economic report Thursday showed continuing labor market strength, another critical bedrock for the economic picture.
Initial claims for unemployment insurance totaled 212,000 for the week ended Feb. 10, a decline of 8,000 from the previous week’s upwardly revised total and below the estimate for 220,000, the Labor Department reported.
Continuing claims, which run a week behind, totaled just shy of 1.9 million, up 30,000 on the week and higher than the 1.88 million estimate.
There also was some good news on the manufacturing front, as regional surveys in the Federal Reserve’s Philadelphia and New York districts both came in better than expected for February.
The Philadelphia survey showed a reading of 5.2, up 16 points and better than the -8 estimate, while the Empire State survey for New York was at -2.4. Although the New York survey still indicated contraction, it was a much better reading than January’s -43.7 and the -15 estimate. The surveys measure the share of companies reporting growth, so a positive reading indicates expansion.
Markets largely took the reports in stride, with stock futures pointing to a higher open on Wall Street.
Investors are closely watching the numbers for clues about which way the Fed will go in terms of monetary policy and interest rates.
Federal Reserve officials have said they are satisfied enough with the prospects for both inflation falling and growth holding steady that the rate-hiking cycle begun in March 2022 is likely over. But they are watching the data closely, with most saying that they will need more evidence that inflation is on a sustainable path back to the central bank’s 2% goal before starting to cut.
Futures market pricing is indicating the first rate reduction will happen in June, with the Fed moving a total of four times, or a full percentage point, by the end of 2024.
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The U.K. economy is worse off today than before Brexit, according to new analysis from Goldman Sachs.
Britain’s decision to leave the European Union has hampered the economy to the tune of 5% versus other comparable countries, the estimates showed.
The Wall Street bank attributed the shortfall to three key factors: reduced trade; weaker business investment; and lower immigration from the EU.

Pro-EU demonstrators protest outside Parliament against Brexit on the fourth anniversary of Britain’s official departure from the European Union in London, United Kingdom on January 31, 2024.
Future Publishing | Getty Images

LONDON — Post-Brexit Britain has “significantly underperformed” other advanced economies since the 2016 EU referendum, according to new analysis from Goldman Sachs, which aims to quantify the economic cost of the Leave vote.
In a note last week entitled “The Structural and Cyclical Costs of Brexit,” the Wall Street bank estimates that the U.K. economy grew 5% less over the past eight years than other comparable countries.

The true hit to the British economy could be anywhere from 4% to 8% of real gross domestic product (GDP), however, the bank said, acknowledging the difficulties of extracting the impact of Brexit from other simultaneous economic events including the Covid-19 pandemic and the 2022 energy crisis. Real GDP is a growth metric that has been adjusted for inflation.
Goldman Sachs attributed the economic shortfall to three key factors: reduced trade; weaker business investment; and labor shortages as a result of lower immigration from the EU.
A Treasury spokesperson told CNBC that the government was “making the most of Brexit freedoms to grow the economy,” including repealing EU financial services law, which it said could unlock a potential £100 billion in investment over the next decade.

Trade and investment down

The U.K. voted 52% to 48% to leave the EU on June 23, 2016, but officially exited the union on Jan. 31, 2020.
Over that period until today, U.K. goods trade has underperformed other advanced economies by around 15% since the Leave vote, according to the bank’s estimates, while business investment has fallen “notably short” of pre-referendum levels.

Meantime, immigration from the EU has fallen — a key pledge of the Vote Leave campaign — only to be replaced by a less economically active cohort of non-EU migrants, primarily students, the research said.

“Taken together, the evidence points to a significant long-run output cost of Brexit,” the report’s authors said.
The bank noted the reduction in trade was in line with expectations and the underperformance in investment was “more pronounced” that anticipated. However, it said the shifts in immigration patterns posed the most important cyclical repercussions for the U.K. economy — and inflation in particular.
“The post-Brexit change in immigration flows has reduced the elasticity of labor supply in the U.K., contributing to the post-pandemic surge in inflation and pointing to more cyclical labor market and inflation pressures going forward,” the report said.
U.K. real GDP per capita has barely risen above pre-Covid levels and currently stands 4% above the mid-2016 level, it said. That compares to 8% for the euro zone area and 15% for the U.S.
Meantime, the U.K. has recorded higher inflation over the period, with U.K. consumer prices rising 31% since mid-2016 compared with 27% in the U.S. and 24% in the euro zone, it added.
While the report noted that new non-EU trade agreements could potentially mitigate the costs of Brexit, estimates suggest that the benefit is likely to be small.
The British government estimates that its free trade agreement with Australia will boost U.K. GDP by 0.08% per year, while the economic impact of a new trade deal with Switzerland is unclear.
Meantime, the timelines for prospective new trade deals with major partners such as the U.S. and India have not yet been announced. More

The consumer price index increased 0.3% in January, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in December.
Shelter prices accounted for much of the rise, climbing 0.6% on the month, contributing more than two-thirds of the headline increase. On a 12-month basis, shelter rose 6%.
Stocks slid sharply following the release and Treasury yields surged higher.

Inflation rose more than expected in January as stubbornly high shelter prices weighed on consumers, the Labor Department reported Tuesday.
The consumer price index, a broad-based measure of the prices shoppers face for goods and services across the economy, increased 0.3% for the month, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in December.

Economists surveyed by Dow Jones had been looking for a monthly increase of 0.2% and an annual gain of 2.9%.
Excluding volatile food and energy prices, the so-called core CPI accelerated 0.4% in January and was up 3.9% from a year ago, unchanged from December. The forecast had been for 0.3% and 3.7%, respectively.

Shelter prices, which comprise about one-third of the CPI weighting, accounted for much of the rise. The index for that category climbed 0.6% on the month, contributing more than two-thirds of the headline increase, the BLS said. On a 12-month basis, shelter rose 6%.
Food prices moved higher as well, up 0.4% on the month. Energy helped offset some of the increase, down 0.9% due largely to a 3.3% slide in gasoline prices.
Stock market futures fell sharply following the release. Futures tied to the Dow Jones Industrial Average were off more than 250 points and Treasury yields surged higher.

Even with the rise in prices, inflation-adjusted hourly earnings increased 0.3% for the month. However, adjusted for the decline in the average workweek, real weekly earnings fell 0.3%. Real average hourly earnings rose 1.4% from a year ago.
“Inflation is generally moving in the right direction,” said Lisa Sturtevant, chief economist at Bright MLS. “But it’s important to remember that a lower inflation rate does not mean that prices of most things are falling — rather, it simply means that prices are rising more slowly. Consumers are still feeling the pinch of higher prices for the things they buy most often.”
The release comes as Federal Reserve officials look to set the proper balance for monetary policy in 2024. Though financial markets have been looking for aggressive interest rate cuts, policymakers have been more cautious in their public statements, focusing on the need to let the data be their guide rather than preset expectations.
Fed officials expect inflation to recede back to their 2% annual target in large part because they think shelter prices will decelerate through the year. January’s increase could be problematic for a central bank looking to take its foot off the brake for monetary policy at its tightest in more than two decades.
“The much-anticipated CPI report is a disappointment for those who expected inflation to edge lower allowing the Fed to begin easing rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial. “Across the board numbers were hotter than expected making certain that the Fed will need more data before initiating a rate cutting cycle.”
Generally, the inflation data had been encouraging, even if annual rates remain well above the Fed’s 2% target. Moreover, core inflation, which officials believe is a better guide of long-run trends, has been even more stubborn as housing costs have held higher than anticipated.
In recent days, policymakers including Chair Jerome Powell have said the broader strength of the U.S. economy gives the Fed more time to process data as it doesn’t have to worry about high rates crushing growth.
Market pricing before the CPI release indicated a tilt toward the first rate cut coming in May, with a likely total of five quarter-percentage point moves lower before the end of 2024, according to CME Group data. However, several Fed officials have said they think two or three cuts are more likely.
Outside of the jump in shelter costs, the rest of the inflation picture was a mixed bag.
Used vehicle prices declined 3.4%, apparel costs fell 0.7% and medical commodities declined 0.6%. Electricity costs rose 1.2% and airline fares increased 1.4%. At the grocery store, ham prices fell 3.1% and eggs jumped 3.4%.
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