UK household consumption seen easing in Q2

UK April’s total retail sales volumes grew surprisingly by 1.3% m/m. It exceeded consensus expectations of 0.6% m/m. But in spite of the solid growth recorded last month, the second quarter carry-over implies softening of 0.2 percentage points to 0.7% q/q, said Barclays in a research report. Retail sales account for around 20% of household consumption. This indicates that retail sales is likely to contribute 0.14 percentage point to household consumption in Q2 2016 after contributing 0.18 percentage point in the first quarter, added Barclays.

Hence if nominal wages do not accelerate in the near term, a likely slowdown of real wage growth is expected to be a drag on household consumption. Meanwhile, the uncertainty due to the forthcoming EU referendum is beginning to weigh on the currently strong levels of consumer sentiment that are likely to decline further as referendum comes closer.  All these factors are expected to compel consumers in postponing their spending decisions.

“We see consumption easing to 0.4% q/q in Q2 16”, said Barclays.

According to Barclays, the status quo is likely to be maintained and the UK is likely to stay in the EU, and hence after the referendum, consumers are likely to start with the usual spending habits again. Factors hampering nominal wage growth pressures are for a brief period of time and not structural in nature. Nominal wage growth is likely to accelerate in the second half of 2016 and in 2017. Also, private consumption is likely to accelerate again to 0.5% q/q in the second half of 2016 and 2.3% in 2017, noted Barclays.