British retailers experienced some of their worst sales conditions in years this past month, and the housing market remains jittery. But despite these negative economic signs, the Bank of England has remained inclined toward raising interest rates. While the majority of the bank's Monetary Policy Committee voted to keep rates on hold, the only other vote was for an increase.
British household spending growth was clearly decelerating at the end of 2004, and has since steepened its decline. Retail sales rose barely at all in the first quarter of 2005, and in April retailers reported a nearly 5% drop in like-for-like sales compared with a year earlier. Not surprisingly, the Confederation of British Industry reported retailer sentiment is the worst since 1992, and retailers' share prices on the London stock exchange have fallen by more than 7% compared with the average since the beginning of the year.
Outside of retailing, private car registrations have fallen by 6% (on a seasonally adjusted basis), yet the growth of spending on services by consumers has remained steady. What could be explaining the mixed signals?
No Lack of Confidence
According to Gallup's April 5-18 poll of British adults*, the changes to the economy are not from a lack of consumer confidence. For the first time in the last two years, Britons are more positive than negative about the country's economic situation. Six percent of Britons rate conditions as "excellent" and 46% rate them as "good"; 36% rate them as "only fair" and 10% as "poor." Given that the country's economic news became relatively more adverse during the month of April, this increased optimism is more likely to be stemming from Britons' evaluations of their own workplaces and family situations.
No Fear of the Future
Consumer spending on durables -- an area traditionally related to the housing market -- has actually been contracting. Big-ticket items -- large appliances and furniture in particular -- have performed badly. The uncertainty in the housing market in late 2004/early 2005 could be leading to fewer people buying new homes, which could in turn lead to fewer purchases of durables.
Nonetheless, home prices continued to rise in April, and the average time to sell and the stocks-to-sales ratio for houses are no longer increasing.
Even more significantly, Britons' fears about the future of the economy seem to be waning. In response to Gallup's April poll the British public expressed its brightest economic outlook in the last two years. Thirty-eight percent of British adults believe economic conditions are "getting better," compared with 31% at the end of 2004, while 43% think conditions are "getting worse," compared with 52% at the end of 2004. This is the first time since Gallup began asking this outlook question in February 2003 that less than half of Britons say economic conditions are getting worse.
Will vs. Means
The economic fundamentals -- such as consumer sentiment -- are clearly in stark contrast to the recent experience of British businesses. The explanation for this dichotomy seems to lie in a range of factors. Recent interest rate increases certainly may have had an impact given Britons' higher levels of debt, and interest rate hikes have come on top of some pre-announced tax increases. So while willingness doesn't seem to have dropped in Britain, the means to spend has.
Yet as the effects of past interest rate and tax increases iron themselves out, confidence will reassert itself as the driver of consumer spending. The job market remains robust, and given that consumption of services remains strong, the British public doesn't seem to be going through a reevaluation of economic lifestyles. Rather, purchases of goods are more likely in many cases to simply have been postponed. Given that public confidence in the economy has mirrored interest rate levels in the past, we should not be expecting an interest rate fall anytime soon.
*Results in Great Britain are based on telephone interviews with 1,012 national adults, aged 18 and older, conducted April 5-18, 2005. For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points. The survey was conducted by Gallup UK.