Stack it higher, sell it cheaper

What I am about to confess will annoy a lot of you. It has annoyed friends and co-workers already and has allowed me to nestle in a cocoon of snugness. My confession is that I have already done my Christmas shopping. I do it throughout the year to allow myself to enjoy the festive period and not spend my time lolloping around a shopping centre, laden down like a pack mule and slowly being driven insane by the ‘Greatest Xmas Hits EVER! Volume 5’.

However, in my rush to insulate myself from these horrors, I may have done myself a disservice. Such is the discounting occurring on the high street at the moment, I could easily be purchasing the same gifts with a 20% discount. "The high street is perfectly set up for the situation that the UK consumer finds itself in."

The high street at the moment is perfectly set up for the situation that the UK consumer finds itself in. Pay has remained low since the Global Financial Crisis began in 2008 but the pickup in employment in the past 12 months has meant that more people are in gainful employment. Combine that with disinflation and outright deflation in some retail areas – namely petrol and food – and you have the makings of some very happy consumers.

We know that last month’s retail sales reading benefited from these movements. Sales rose by 0.8% in October against a 0.3% expectation. Prices in every category of goods measured in this release fell for the first time since 2002. Retail sales are a volume measurement, not one of value and therefore in the current period of disinflation it is almost a certainty that they would be looking strong. Obviously on a value basis, that does not apply and we are expecting to see retailers warn about margins in their Q3/4 earnings releases.

Unfortunately moving forward, while there is a case to be made for a good Christmas for consumers with sales discounts open earlier and be deeper than years before, the outlook for the high street as a whole is not a good one. Until real wages start improving – something that we see happening late in Q1 of next year – the recovery of both consumers and retailers cannot be guaranteed.

Towards the end of last week, we started to hear the first real calls that the Bank of England may decide to hold off on rate rises until 2016 – the year that the Bank of England originally forecast rate rises following a decline in unemployment to 7%. The latter condition has been fulfilled, we are still waiting on the former.

The nervousness and variance that we are seeing in rate predictions was compounded by the minutes of the Bank of England meeting published last week. The overall tone of these Bank of England minutes was one of risks. Risks that the housing market continued to slow more than anticipated, that growth might soften further, and that the weakness in the Eurozone and China will outweigh any buoyancy seen domestically.

There is also a lot to be said for the notion that the Bank of England may be actively worried about being the first mover in these markets. In previous breaks from a global slowdown it has been the US Federal Reserve that has led the charge into a tighter monetary policy atmosphere. The major central banks of the world economy loosened monetary policy together to deal with the onslaught of the Global Financial Crisis but there is little hope that they will do similar on the way back.

This week’s sterling highlight is the second iteration of Q3 GDP on Wednesday morning. I am expecting growth to be confirmed at a rate of 0.7% in Q3 with a decent impact from consumption and investment. Unfortunately I am thinking that the export environment – poor demand and a strong pound – could easily disappoint but it shouldn’t be enough to damage the overall YoY figure of 3.0%.