Beware false dawns

[OwlHoot]

MPs expenses scandal is winding down. Daily Doomagraph is back to its usual trade.

No way, it's building up to a crescendo timed for the June EU and local elections.

(and we still have Ed Balls and Yvette Cooper's expenses, among others, to come )

[swamp]

MPs expenses scandal is winding down. Daily Doomagraph is back to its usual trade.

[BrilloPad]

http://www.telegraph.co.uk/finance/c...ly-stages.html

Beware false dawns, the consumer downturn is still in its early stages
Don't laugh. Last week saw some unexpected good news.

Figures from the Office for National Statistics (ONS) showed that retail sales volumes rose by 0.9pc in April alone, making 2.6pc over the year as a whole. Spending on the high street has continued to hold up amazingly well. Indeed, if you looked only at the retail sales figures, you wouldn't know that we are in a recession. What on earth is going on?

One possibility is that the numbers are highly misleading. There is no convincing evidence that these figures were unduly distorted by MPs spending the last of their expense allowances. Still, you never know. As we have learned, the amounts are potentially large enough.

We do know, however, that in the past few months the ONS has come in for a drubbing over the reliability of its retail sales figures. Nonetheless, we cannot dismiss them altogether. Both the BRC's measure of annual growth of like-for-like sales values and the CBI's reported sales balance also rose in April. Moreover, these surveys have been on an upward trend since the start of the year.

So why have retail sales been strong? One explanation is the decent weather we've had recently. No, this isn't a joke either. The weather has been good – compared to the dismal spring last year. But I find this argument unconvincing. Good weather tends to benefit some sorts of shops – like clothing retailers - but to dent sales at others – such as department stores.

Another explanation could be that the raft of sales and promotions we see on the high street are encouraging consumers to bag a bargain. But the official inflation data don't really back this up. High street inflation (core goods CPI inflation) has risen for the past four months, as retailers have managed to pass on at least some of their rise in import costs.

A large part of the explanation, though, is that retail sales make up only 40pc or so of our total spending, and much of this is on stuff which does not respond closely to the economic cycle. Food sales, for instance, usually outperform during a recession, given that food is a necessity. And supermarkets appear to have been particularly adept this time round at tempting people to swap their meals out for meals at home through "dine for £10" promotions and the like.

When it comes to spending away from the high street, the picture looks completely different. As a result, despite the recent strength of retail sales, on Friday it was announced that in the first quarter of this year, overall consumer spending fell by 1.2pc, the biggest fall since 1980.

Around 17pc of consumer spending is on housing costs – rent, utility bills and the like – and another 9pc is spending on travel, such as petrol and train fares. This is all spending that, at least in the short term, households have little control over. But the rest is discretionary stuff – 5pc of spending is on cars, 4pc on recreational services (like going to the cinema or theatre) and 12pc is on hotels and restaurants, with the remaining 13pc or so on health, education, financial services and phone bills.

Plummeting car sales have clearly been a key factor dragging down non-retail spending. In April, new car registrations were down by 27pc on a year ago. Spending in pubs, hotels and restaurants has been falling too. And according to the Bank of England's regional agents, people have also become more reluctant to commit to regular outgoings like gym memberships.

But part of the explanation for still reasonable retail sales is that, regardless of the recession, conditions facing many consumers simply aren't that bad at the moment. Consumer confidence has been edging up since the start of the year – perhaps reflecting relief that the banking system has been saved from collapse, as well as media coverage of "green shoots".

Consumers are still benefiting from a net fiscal giveaway this year. And many households have been enjoying a bonanza as their mortgage payments have plummeted. Households' debt interest payments more or less halved in the final quarter of last year. It is true that savers' incomes have also been slashed and in principle these two effects may be offsetting. But it has always seemed likely that the favourable response of borrowers would outweigh the unfavourable response of savers.

There are good reasons, though, to expect recent strength on the high street to wane. The boost to households' income growth from falling mortgage payments has now largely passed. With official interest rates as low as they can go, mortgage rates will only fall further if lenders are willing to narrow their spreads – and that seems unlikely when they are still struggling to rebuild their capital bases. Meanwhile, the drag on income growth from rising unemployment and slowing pay growth is building. Last week, Ofcom became the latest organisation to announce a pay freeze.

And not only is the rate of increase of income under pressure but the percentage of income devoted to saving, i.e. not spending, is set to rise. At one point the saving ratio (the proportion of their income that people devote to saving) fell to 1.2pc. By the end of last year it had risen to 4.8pc. But this is low by historical standards. I think that it will have to rise to double digits.

Meanwhile, just to clobber any hint of optimism from the upbeat retail sales figures and the promise of warmer weather, last week's figures on the public finances were absolutely dire. Net public borrowing came in at £8.5bn in April, compared to last April's figure of £1.8bn. This underlined the fact that a major fiscal consolidation lies just around the corner. Whether that is achieved through higher taxes or lower public spending, affecting the average pay of public employees or the numbers employed, will not make much difference to the effect on aggregate demand – and consumer spending. Overall, consumers will feel the ill-effects either way. Diversity awareness co-ordinators go shopping too.

So don't let the retail sales figures lull you into a false sense of security. This consumer downturn is still in its early stages.

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The question is what will this have on the stock/housing market. Or maybe that is 2 questions........