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Consumer strains in the UK era of less for more

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It became clear that Christmas 2022 was the holiday season where we all paid more but got less.

Perhaps this is evident in the time of double-digit inflation. But the British consumer, collectively, was ready to set out to achieve not quite the same current quantity or ceremonial spread. This bodes well for next week’s trading updates for retail traders. But it is a situation that is unlikely to last until 2023.

The data was already suggesting that way in the run-up to the Christmas break. In retail sales in November, there was a 3.6 percent increase in the value of purchases, excluding petrol, compared to the previous year. This reduced the percentage of shoppers in the country by 5.9 percent in terms of the volume of goods sold. Compare November and February 2020, when the British consumer hands over 14 per cent off sterling for essentially the same volume of goods.

Elevated tables and expanding waistlines should have been—from a retail perspective, if not from a public health perspective—a bright spot. Groceries got a larger share of the spending as consumers sought to protect Christmas dinner. In a year when hospitality has suffered again due to strikes and disruptions in the transport sector, grocery sales in December hit a record £12.8bn, up more than 9 per cent, according to Kantar. But sales by volume still fell 1 percent, despite increased circulation down to low-margin supermarket brand products. Mince pie lovers spent 19 percent more to scoff at essentially the same number of desserts.

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The latter consumer feeling was hurray Reinforced by the next high street bell Thursday. It’s true that December’s strong retailer numbers were helped by a rush for coats in the cold, and out-of-town shops benefiting from rail chaos. But fourth-quarter full-price sales, which rose 4.8 percent, were much better than expected, helping the retailer revise its pretax profit forecast for the year ending in January slightly higher. Promotion Discounter B & M. Earnings forecasts suggest this hasn’t just polished the halo of the following as the UK’s top retailer.

However, the overall message has been that customers can’t keep up with rising energy bills and rising mortgage costs — with 3-4 million mortgages expected to reset to higher rates this calendar year, according to Shore Capital.

Then, admittedly always cautious, believes higher prices, lower sales volume and affordability pressures will reverse sales growth this year. Full-price sales in the year ending January 2024 are expected to decline by 1.5 percent. Selling prices are expected to rise by 8 per cent in the first half of the year and 6 per cent in the second half of the year, while gross volumes are expected to decline sufficiently to produce £30 million in operating cost savings, approximately as much as the estimated increase in Gas and electricity bills.

One serious unknown is how much festive cheer has been enjoyed in the country, which has put more strain on budgets this year. “Christmas may have been deceptively good, especially for high-street retailers thanks to cold weather and postal strikes, fueled by a rise in buy-now-pay-later credit cards,” said Ken Tan, retail specialist at PricewaterhouseCoopers. “Either way, there’s no question shoppers will have to rein in discretionary spending this year.”

Next’s financial income, from its credit operations, increased nearly 8 percent in the second half of 2022, and you expect growth to remain (only) positive this year. The company attributed this to customer balances, which then returned to normal Debt has been reduced during a pandemic.

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Bank of England this week For a sharp rise in consumer credit In November, due to higher levels of credit card borrowing. Consumer credit, aided by pandemic savings and low unemployment, has been remarkably resilient in the face of cost-of-living pressures. But the central bank in December Note the pressure increase On families’ ability to sustain this debt, especially with mortgage rates back up.

The first half of this year continues to look tricky for retailers and lenders alike.

helen.thomas@ft.com
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Strong economic data points to a shallow recession in the Eurozone

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Unemployment in the eurozone hit a new record low, while output from German factories rose in November, boosting hopes of a milder economic slowdown than fears in the single currency area.

Figures from Eurostat, the European Commission’s statistics office, showed that the number of people in the labor market without work fell slightly in November. Eurostat reported that 10.849 million workers were without jobs, 2,000 fewer than the previous month and the lowest since records began. The unemployment rate has remained unchanged since October at 6.5 percent.

Meanwhile, Germany’s Federal Statistics Office reported that industrial production rose 0.2 percent between October and November, a reading slightly better than the 0.1 percent expansion forecast by economists polled by Reuters.

Francesca Palmas, chief economist for Europe at Capital Economics, a research firm, said the rise confirmed that German manufacturing strength “held up better than expected” during the fourth quarter of 2022.

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On Friday, Germany’s statistics office is set to publish its first estimate of last year’s gross domestic product, which economists expect to show the economy contracted by a modest amount during the last three months of 2022.

The rise in energy prices last spring after Russia’s invasion of Ukraine raised fears of energy shortages and a deep recession in the eurozone. However, economists have steadily raised their growth estimates in recent months on the back of better-than-expected incoming data and falling wholesale gas prices.

Investor sentiment regarding the Eurozone economy also improved. The Syntex market sentiment index, also published on Monday, showed the third consecutive increase in January to the highest level since June 2022. Patrick Hussey, managing director of Syntex, said.

The resilience of the eurozone economy and its labor market it is expected that It leads to more interest rate increases by the European Central Bank.

With unemployment stuck at historically low levels, “the ECB’s hawkish tone is likely to multiply with further tightening in the coming months,” says Paolo Grignani, economist at Oxford Economics.

Markets are pricing in a 50 basis point increase in interest rates when the European Central Bank meets on February 2nd. That would be up from the 2.5 percentage point increases since June last year, which took the deposit rate to 2 percent in December.

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A tight labor market could boost wage growth and keep core inflation higher for longer. While the headline inflation rate fell to single digits in December, come in at 9.2 percentCore inflation — which excludes changes in food and energy costs and is seen as a better measure of long-term price pressures — rose from 5 percent to 5.2 percent.

Line chart of 2022 GDP growth forecasts, by forecast date showing that economists have revised their 2022 economic growth forecasts for the Eurozone

Bert Collin, chief eurozone economist at ING, noted that the strength of the labor market “makes it a key risk for the ECB’s second round inflationary effects.” With a tight labor market, Cullen added, “unemployment is unlikely to rise enough to make labor shortages a thing of the past.”

Between October and November, the unemployment rate in Italy, France and Spain fell by 0.1 percentage point to 7.8 percent, 7 percent and 12.4 percent, respectively. It remained at 3 percent in Germany.

Melanie Debono, chief economist for Europe at Pantheon Macroeconomics, said fiscal support across the eurozone should prevent a “significant increase in unemployment,” despite the economic downturn.

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UK and EU Hit Break in Brexit Talks on Sharing Trade Database By Bloomberg

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& Copy Bloomberg. A Royal Mail Plc transporter trailer is loaded onto a ferry at the Port of Larne in Larne, Northern Ireland, UK, on ​​Tuesday, July 5, 2022. British Prime Minister Boris Johnson wants Parliament to pass his plan to override the Brexit deal by The end is from 2022, but it could take up to a year to become law if the House of Lords gets involved. Photographer: Emily McInnes/Bloomberg

(Bloomberg) — The European Union is preparing to agree to use the UK’s live database to track goods moving from Great Britain to Northern Ireland, the first sign of progress in a long-running dispute over post-Brexit trading rules.

An agreement was finalized at a lunch between British Foreign Secretary James Cleverly and European Commission Vice President Maros Sefkovic on Monday, according to people familiar with the matter.

Someone said that the block completed the test of the database proposed by the United Kingdom last year, and suggested several areas for improvement. The person added that the UK had agreed to work on the comments.

This development is the first hurdle cleared since talks began again last year after eight months of deadlock. Although a technical step, the database deal will raise hopes of a further agreement on trade flows, and may help reduce customs checks between Northern Ireland and the rest of the UK.

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The UK government did not immediately respond to a request for comment.

© 2023 Bloomberg LP

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Central banks can’t win when it comes to inflationary credibility

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The writer is a former central banker and professor of finance at the University of Chicago Booth School of Business

Why does the US Federal Reserve find it so difficult to convince the market that it means business when it comes to not cutting rates? The minutes of the December meeting clearly stated, “No participant anticipated that it would be appropriate to begin lowering the federal funds rate target in 2023.” However, this hawkish statement did little to change market expectations, making the Fed’s task of slowing the economy even more difficult.

Central bank statements have an impact because people still believe that institutions will do what they say. This credibility is obtained through a combination of central banks’ reputations (either dovish or hawkish), past actions, and the policy tools they possess and the frameworks under which they operate. Unfortunately, the kind of credibility needed to escape a system of very low inflation, which we had until recently, is different from the kind needed to curb high inflation, which we have now. Credibility, by its very nature, does not turn into a dime.

Traditionally, central banks have grappled with high rates of inflation. Government spending usually overestimates the economy to generate growth. Central banks helped and abetted this, not only by keeping interest rates low, but by financing government spending. In the process, they managed to stoke inflation, which hurt growth where it had taken hold. Then, perhaps learning from the Fed under Paul Volcker, countries decided it was best to have an independent technocratic central bank, mandated to keep inflation in check through an inflation targeting framework. Thus, banks gained credibility as an inflation fighter.

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But after the global financial crisis, inflation dropped dramatically, making the challenge push it up again. In order to increase inflation, central banks had to develop a new kind of credibility. In the words of economist Paul Krugman, they should have “credibly promised to be irresponsible” when they saw inflation, by committing to curbing it rather than fighting it furiously.

And so central banks adopted a new set of tools. Quantitative easing, for example, whereby the bank announces that it will buy government bonds for an extended period, worked in part by requiring the bank not to raise interest rates until the announced buying program ends. In fact, this may be part of the reason why both the Federal Reserve and the European Central Bank were slow to raise interest rates when inflation picked up in late 2021. Central banks also acted in ways that undermined beliefs about their intent to raise rates, as they did when they halted rate increases. After the markets started to faint in late 2018.

Finally, central banks have changed their frameworks to include inflation tolerance within them. A key component of the Fed’s new framework, adopted in 2020, was that it would not be preemptive in avoiding inflation. The old mantra abandoned, if you’re staring at swelled eyeballs it’s already too late.

While none of this was particularly effective in raising inflation, it may have encouraged the government to spend more, knowing that the central bank would not raise interest rates quickly. When the pandemic hit, there were few restrictions on government spending that, along with the war in Ukraine, pushed us back into a system of high inflation. But central banks again find themselves with the wrong kind of credibility – that is, the assumption that they will tolerate inflation. No wonder markets continue to price in Fed cuts, even as the Fed insists it won’t become accommodative until inflation is tamed. In short, the credibility of a central bank is useful only when it is relevant to the inflationary system it faces.

Should the Fed act again to restore its credibility as an inflation hawk? It takes a long time to build credibility, and inflation regimes can change again. It is not inconceivable that an aging population, declining immigration, deglobalisation, and a slowing China could push the world back into a low-growth-inflationary environment.

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However, central banks are likely to be more effective if they rebuild their commitment to combating high inflation. And if inflation gets too low, maybe we should learn to live with it. It’s hard to argue that all the frantic activity in the recent low-inflationary regime was effective, distorting credit, asset prices, and liquidity in ways that hurt us today. But as long as low inflation does not collapse into a rapid deflationary spiral, central banks should not worry excessively. Instead, they should shift the burden back to governments and the private sector when it comes to achieving sustainable growth.

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