Fit For Consumption

22/04/2016 at 5:37 pm

Since the summer of 2014 the economic landscape has changed in ways which ought to have brought joy to consumers in various parts of the world. The oil price has collapsed: good news for significant net importers like the USA. There, as in Britain too, job growth has brought the country to near-full employment. In the UK last year we saw positive, sustained growth in real wages for the first time since the Great Recession. In Europe and Japan, which have lagged those other economies in growth terms, central banks have tried to oil the wheels with rate cuts and the expansion of unconventional monetary measures.

Yet this week there were headlines in Britain about the weakness of consumer behaviour. It looked a running certainty earlier this year that the market panic was overdone. But are there signs showing here of strength for the bear case after all?

Looking at the UK first of all: no, not really. Consumer confidence reached 15-year highs last year, and while the survey measure has lost some steam into 2016 it remains above the running average over the year before that. Scrabbling around for negatives, the rate at which new car registrations increased fell to +6.5% in 2015 from +8.6% previously. This is hardly disastrous. And broad retail sales growth across all sectors averaged +4.5%, an 11-year high. The GDP print for Q4 2015 put the annual increase in household expenditure at +2.7%, up a little on 2014 and in line with long run averages. And while readers will know this blog is ambivalent on the subject of housing itself at present, mortgage approvals staged a recovery last year too after falling away in 2014 and that pickup has continued since year end.

The picture is a little cloudier across the Atlantic, but again, far from catastrophic. The personal consumption component of GDP for Q4 grew by +2.7% on the year – also in line with long term averages – though in this instance down from +3.2% in Q4 2014. Retail sales growth has fallen more obviously too, to a 12-month running average of +2.7% to March of this year down from +4.1% across calendar 2014. What is equally interesting, however, is that auto sales over the same period averaged 17.4m, up by a full 1m on 2014 and running at a 15-year high. Existing home sales, too, quickened in pace to the highest level since the credit crunch. Perhaps this is a sign that the net impact on consumption from oil has been disappointing, but that credit expansion has fueled asset purchases instead (a supposition reinforced by a rise in the level of student debt per capita). One can be ambivalent about this again, of course – but it is expansionary economic activity driven by consumer behaviour.

At the other end of the growth spectrum, Japan has had a terrible time of it in recent quarters. At the same time, recovery from yet another period of economic contraction has seen the downturn in household consumption as listed in the GDP figures abate, to a year-on-year pace of -1.3% for Q4 2015 as against -2.0% for Q4 2014. Car sales growth as well as broad retail sales growth has been flat; nationwide housing starts have risen measurably while condominium sales in Tokyo have declined again. So a more mixed picture here, but one which has not been declining any more than it has been showing signs of vibrancy overall.

Finally, Europe has also suffered something of a lost decade, having been through a double-dip recession which the US and UK were spared. Yet here the strength of the consumer has actually been most noticeable. The running 12-month average pace of retail sales growth is stronger now than it has been at any time since 2001. The household consumption component of eurozone GDP rose to an annual +1.7% in 2015 from 0.8% a year earlier, and sits well above the average of +1.1% seen since the zone began life in 2000. Data on building permits and mortgages outstanding show a marked rise over the last year, and passenger car registrations have been rising at a running average of +9.6% over the last twelve months up from +3.5% during 2014. It is most obvious to attribute stronger consumer demand here to cheap energy – as the eurozone is the biggest net oil importer by some distance, this is after all the most obvious place to look. (We should also note, however, that the unemployment rate has begun to fall at a faster pace in recent quarters too.)

For growth investors, growth rates have the constant potential to disappoint. These remain nervous, and volatile times. But if we take a good look at the available data there is nothing to suggest that developed-world consumption has done anything more than fail to respond to the theoretically benign tailwinds of cheap oil and monetary expansion in the way that some might have hoped. This is not the same thing as failing to respond at all.

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