UK attention to retail: The last six months has been a period of growth for UK retail, but how will it close out 2018?

As we entered the closing quarter of 2018, UK retail looked set to finish the year in a more convincing position than it started, following a six-month stretch of growth.

Retail market value in October 2018 was 3.6% greater than 12 months ago, whilst volume was 2.8% higher.

This is a healthier form of growth than was evident this time last year. In October 2017, nearly all the 3.1% value growth for the UK retail industry was derived from price inflation. Volume growth had started to faulter in May 2017 and finally sunk to nil by October 2017, remaining low for a further six months.

Since launching from 1.1% to 4.5% in May 2018, volume growth has averaged 3.5% for the last six months, indicating that value growth in the retail market (which averaged 4.7% over the same period) is now, at least in part, being driven by increased demand (which is more likely to translate into profits) rather than a weaker currency.

Whilst growth will likely remain at a good level for the remainder of the year, a glance at Figure 1 highlights a possible downward trend emerging. October's figures are the lowest growth rates in the last six months (including the small glitch in June 2018, which had value and volume growth of 4.3% and 2.9% respectively). This could be a seasonal fluctuation (whilst the pattern matches that of last year, it does not match the preceding years) or it could imply that the market is starting to lose momentum (notwithstanding a potential Christmas spike).

At a subsector level, the strongest performing subsectors for the month were non-store retailing and household goods with weak growth continuing in fashion.

Macroeconomic indicators showed mixed results. UK job vacancies reached a record high, leading to real wage growth in line with those of a decade ago. This could lead to higher disposable incomes and, together with a still strong consumer appetite for credit, could translate into increased sales for retailers (in the short to medium term). Meanwhile, high street footfall and property prices continued to fall, dampening the otherwise promising short-term economic signs.

With the final run up to Christmas as important as ever, a key question is whether the economic platform is firm enough for retail to maintain its growth through to the New Year. January is likely to be telling, as we look forward to a range of company Christmas trading results. The underlying strength may become more apparent after the consumers' holiday fever subsides.

UNEMPLOYMENT

October saw unemployment increase to 4.1%, up slightly from its 43-year low of 4.0% in September.

With the market close to full employment and inflation falling, employees are beginning to see real wage growth at levels not seen since 2009. This prompted Bank of England chief economist, Andy Haldane to conclude there is "compelling evidence of a new dawn breaking for pay growth".

Figures suggest that the historic relationship between low unemployment and wage growth is returning, following a stagnant decade of wage growth despite falling unemployment over the last few years.

With UK job vacancies reaching a record high of 845,000 in October and the resulting demand continuing to create an upward pressure on wages, retailers will be hoping that this translates into higher disposable income and greater consumer demand over the coming months.

CONSUMER CREDIT

The latest statistics from the Bank of England indicate that unsecured consumer debt rose to £215 billion in October, an increase of 5.2% when compared to the same month last year—the lowest growth rate for nearly three years. This will come as welcome news to the Bank of England, who have actively been encouraging lenders to tighten their underwriting standards ahead of the anticipated economic headwinds.

Nevertheless, several market commentators anticipate that consumer credit will continue to remain high for the foreseeable future. George Robbins, director of financial services at TransUnion, commented that "while consumer credit [growth] is lower than we've seen in much of the period over the past couple of years, it is likely to increase as we head toward the Christmas season, with all the additional spending that brings—and the bigger picture remains one of high consumer debt in the UK."

This is good news for retailers in the short to medium term, but only so long as consumers don't overextend themselves. If shoppers are comfortable wading deeper into debt, retailers can expect to see a portion of that money come to them. However, the greater people's debt commitments, the more treacherous the economic waters become and, with it, the risk of running aground in stormy weather. Should consumer credit reach unsustainable levels, credit availability may start to dry up and retailers sales along with it.

FOOTFALL

The long-term decline in UK footfall showed no sign of abating in October, with data from ShopperTrak indicating a 4.5% decline compared to last year. Despite mild temperatures at the start of the month, it appears Storm Callum and the resulting cold snap may have encouraged many consumers to stay at home.

The South West and Wales continue to be a difficult market for brick-and-mortar retailers, having experienced declines of 12.4% compared with October 2017. Northern Ireland, in contrast, has shown some resistance to market trends, with a 3.5% increase in footfall.

Whilst typically footfall is likely to rise week-on-week in the lead up to Christmas, early indications are that it will be reduced from last year. However, as consumers continue to migrate to online shopping this decline may not necessarily translate into reduced sales across the broad retail market.

PROPERTY PRICES

Average house prices in the UK fell by £387 to £214,534 in October 2018, as property prices continued to stagnate. Despite limited borrowing costs and historically low unemployment, consumer sentiment continues to be impacted by Brexit and the resulting economic uncertainty.

Nationwide's chief economist, Robert Gardner, commented "If the uncertainty lifts in the months ahead, there is scope for activity to pick up throughout next year. The squeeze on household incomes is already moderating and policymakers have signalled that interest rates are only expected to rise at a modest pace and to a limited extent in the years ahead."

The outlook for house prices as we move into 2019, will largely depend on the perceived risks in the UK economy, particularly with the softening of the London market.