News & analysis

January’s retail sales data should put to bed any doubts around the UK’s economic prospects heading into 2024.

The release delivered a monstrous upside beat to reverse December’s slowdown, and in our view heralds the consumer’s return as a positive force for growth this year. As we warned yesterday, concerns over the UK economy were overblown in our view, despite Q4 GDP figures suggesting it entered a technical recession to end 2023. Whilst this generated significant headline coverage, the marginal contraction hardly warranted the kind doom mongering that was generated in some quarters. As we saw it, this slowdown in activity is more consistent with an economy that has stagnated, and even then, only temporarily. Growth should pick up early in the new year as indicated by recent flash PMI releases, and supported by a recovery in consumer activity fuelled by growing real wages. A key test of this thesis came in this morning’s retail sales data, which were by all accounts expected to deliver a decent improvement on December’s dire print.

Even so, the 3.4% MoM increase in sales far exceeded what both ourselves and markets had anticipated. All told, this should put to bed any worries around UK growth prospects, and confirms our view that the economy should be set to outperform expectations in 2024.

As noted by the ONS, the improvement in today’s figures comes following a record MoM fall in December of -3.3%, the largest since January 2021 when Covid 19 restrictions hampered sales. Not only did this jump fully reverse the prior slump, but it left annual retail sales volumes up 0.7% when including fuel costs. Even when excluding fuel, the picture remains the same, with retail sales ex fuel growing by 3.2% MoM and 0.7% YoY. Admittedly, online sales fell by 4.1% in January as consumers hit the high street, but this marked the only notable point of weakness in what was an otherwise largely upbeat release. Arguably today’s upside surprise marks a reversion to the mean following a notably weak December print, with this having occurred in part because consumers chose to purchase Christmas gifts earlier during the November Black Friday discounts. To this point, non-food stores sales volumes returned to broadly expected levels in January, with a rise of 3.0% MoM, mostly reversing December’s 3.9% fall. Moreover, the recovery was also likely also helped by discounting in the January sales, a point noted by some retailers, with sales volumes in department stores and other non-food stores rising by 5.4% and 6.2% respectively, with food sales also rising by 3.4% over the month.

This should not, however, take away from the broad strength shown across the release, with this morning’s figures representing the largest MoM rise in retail sales since April 2021, and well above consensus that expected just 1.5% MoM retail sales growth. Indeed, there was growth in sales across every retail sector except for textile clothing and footwear, where unusually mild weather appears to have marginally depressed demand over the winter period.

Taken as a whole, this means that sales volumes fell 0.2% in the period covering November to January when compared with the three months prior, but this also marks the smallest such fall recorded since August 2023. This is notable given that August was also the month last year where PMI readings slipped below 50, heralding the economic slowdown that took hold at the end of 2023. But with PMI readings having recovered to well above the 50-no change mark, and real wages having grown for more than half a year, combined with today’s data it suggests to us that the beginnings of a consumer-led recovery are now underway. For now, markets are largely taking this morning’s data in their stride, with sterling notching only very marginal gains against the euro and the dollar.

That said, a mix of positive growth and inflation pressures that should continue to cool slowly in 2024 should, we think, keep the BoE on hold until the second half of the year in line with our base case call.

This in turn should also offer a notable contrast to the eurozone, where both growth conditions and inflation pressures look somewhat weaker to us. We expect this to be on full show next week when February’s flash PMIs land, and should offer sufficient evidence for markets to take sterling on its next leg higher, particularly against the euro.



Nick Rees, FX Market Analyst


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