Consumer Spending Declined In December, and Further Decline In January Could Result In Interest Rate Cuts
20 Jan 2020
Approx Reading time: 3 minutes
- From November to December 2019, consumer spending declined by 0.6%.
- PM Boris Johnson’s win has resulted in improved confidence for British consumers, but even with improved disposable incomes due to low unemployment and moderate inflation, households are still not spending as much as expected.
- If this decline in consumer spending persists, the Bank of England might cut down interest rates by the end of January to encourage higher spending.
The trend of reducing consumption by the British people has continued in December of 2019, according to reports, marking the fifth month that such a decline has been observed. This is symptomatic of a weakening economy in the UK, and experts believe the Bank of England might be prompted to slash its interest rates in the month of January.
The reported data has highlighted a decline of around 0.6% in the month of December compared to figures reported in the prior month, which is lower than the median estimated decline projected by experts, as per a Reuters poll. This also included sales generated on Black Friday as well as Cyber Monday, which are famous for drastic sales promotions.
According to the Office of National Statistics, this persistent decline since July is the longest since 1996, which is when the Office started maintaining a record of this metric. The database held by the Office also shows that the largest decline in spending over the past three years has come in sales pertaining to food items.
Investors have now become wary that the Bank of England is very likely to cut down its interest rates and, as a result, bond prices in the UK have increased while the Sterling has weakened in value. It is expected that the revised interest rates would be announced on the 30th of January after the Bank holds its upcoming meeting.
Out of the 9 policymakers that are involved, 2 have already voted in the last two months of 2019 in favour of a decrease in interest rates. Among these two is Governor Mark Carney, who has opined that the borrowing costs might have to be reduced in the near future considering the economic environment.
Experts had anticipated that consumers may have regained some confidence after the elections of December 12th that declared Prime Minister Boris Johnson as the winner. However, recent data has provided evidence that spending has not actually increased. This has had an adverse impact on the GDP growth of the country and offered a bigger push for the British government’s Monetary Policy Committee to cut rates.
But, there is consensus among experts that uncertainty among the British people has certainly decreased after the elections, and hence sales might pick up in the month of January to some extent. If that happens, and if business surveys highlight such an improvement, then, according to Allan Monks, an economist working at JP Morgan, interest rates might not be cut after all.
On an annual basis, sales volumes at retail outlets showed a growth rate of only 0.9%, which is lower than all estimates provided in the poll conducted by Reuters. And this figure might decline at the conclusion of 2020 as well, considering the Prime Minister’s remarks about concluding the transition period for Brexit by this year’s end.