Why there's no guessing how the consumer will behave
Economy Watch by Andrew Webb, managing director of Webb Advisory
We have long-known that consumer spending drives much of our economic growth, so knowing what consumers are doing and feeling is of importance for economy watchers.
I pay particular attention to consumer confidence indicators and actual performance data from retailers.
To that end, the retail sales tracker from Belfast City Centre Management (BCCM), which surveys 100 city centre retailers, provides a fascinating insight into Belfast's retail performance over the Christmas period. I'm happy to declare an interest here - I am the chairman of BCCM but can't claim any credit for compiling the retail sales tracker.
This was an important Christmas trading season for Belfast - sterling's decline following the Brexit vote, coupled with one of the biggest marketing campaigns in years, led retailers to face into the Christmas season 'cautiously optimistic'.
The retail sales tracker asks respondents to compare performance in November and December against the same period 12 months previous. The results make for broadly positive reading. For November, 62% of retailers reported an increase in sales, and 24% were down. The average increase in sales for November 2016 compared to November 2015 was close to 7%.
We often note, and it is true, that our city centres are struggling to compete with online retailers, so it was interesting to learn that this increase in reported sales was coupled with a 6% increase in footfall into the city centre in November. I hear anecdotally that public transport enjoyed a very strong Christmas too.
Performance got even better in December. Two-thirds of retailers reported sales performance was up compared to the previous December. The average sales increase for December was over 10%. Footfall was up by just over 1% on the previous December.
Some of this increase was driven by cross-border shoppers and, while the survey doesn't track the change in numbers of southern shoppers over time, 60% of retailers rated their sales from southern shoppers as better than average.
The future path of sterling against the euro will shape how this trend develops. Indications are that sterling will remain relatively weak for some time.
All in all, the Christmas trading season in Belfast appears to have been a success, but there is a renewed air of uncertainty that has crept in since. In the same survey, when businesses were asked how they expect sales to perform in 2017, just under half expect an increase while one in 10 expect a decline. This marks a contrast in confidence from this time last year when 60% of retailers were expecting an upturn in sales.
When asked, expected increases in business rates, rising staff costs, inflationary pressures on supplies and rising fuel and energy costs appear to be weighing on the minds of our retailers.
But what of consumers and the year to come? There is some tentative evidence emerging that consumer spending has run out of steam, and that higher inflation on essential items such as petrol and diesel is diverting spending away from discretionary spend.
Data from Barclaycard, which processes close to half the UK's credit and debit card transactions, shows that while consumer spending was up 4% in February, expenditure on 'nice to have' goods was reversing, with department store spending down 5.2% and spending on electronics down 4.5%. Spending on petrol forecourts was up nearly 20%.
Barclaycard's data suggests consumers are prioritising 'experience' purchases and social occasions over physical goods. Entertainment spending saw double digit growth of just over 10% while spending in pubs is up 13%. Maybe we are escaping our economic woes?
As inflation begins to creep up, consumers are reflecting this in how they spend, and confidence seems to be waning. Research carried out by GfK on behalf of the European Commission saw UK Consumer Confidence for February decrease by one point to -6, having spent December and January improving.
The year ahead looks set to be a challenging one for consumers and retailers. That said, consumers have found an extra gear before and boosted their spending with renewed vigour.
It is harder to see from where a consumer bounce would come, but then again, economic data has been confounding us for a while now.
In next week's Economy Watch, we hear from Danske Bank economist Conor Lambe