Beaufort Analysis 262 – Cost of living squeeze

High street spending in the run-up to Christmas increased at its slowest rate for five years due to escalating prices forcing shoppers to spend more on food and other essential items. The news from the British Retail Consortium (BRC) sent a worrying signal to non-food retailers at a time of crucial trading updates for the sector and this has been borne out by those companies reporting thus far. For the three months to December, food sales were up 2.6% while non-food items fell 4.4%, prompting the BRC chief executive to declare that the divergence had never been so stark.

Due to continued high inflation and low wage growth, there has been a rise in consumer debt, but according to the Bank of England (BoE) and Financial Conduct Authority (FCA), this is due to the most credit-worthy borrowers taking advantage of cheap car finance deals and interest-free credit card offers. Consumer borrowing has increased at its fastest rate for more than 11 years and BoE Governor, Mark Carney, has warned that continued unsecured lending at the current rate could destabilise the financial system.

Strong economic growth has pushed the price of Brent crude oil to a three-year high of almost $70 a barrel, assisted by falling inventories. Additionally, the Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC members have ratified their agreement to curb production until the end of 2018, and there are fears that Donald Trump will hit Iran with fresh sanctions, constraining oil supply. With consumer spending already declining, drivers could be forced to pay more at the pump this year.

More positively, UK manufacturing output expanded at 0.4% in November; its seventh monthly increase in a row and its fastest rate since 2008, according to the Office for National Statistics (ONS). The growth in manufacturing helped Britain’s trade deficit narrow by £2.1bn as exports outweighed imports. The construction industry, however, contracted at its fastest rate for five years, falling 2% year-on-year, amid fears over Brexit though it had risen around 30% from mid-2013 to its peak in March 2017.

The markets nevertheless, continue to provide investors with some financial comfort as all four major UK and US indices, as well as most European and Asian bourses, hit fresh highs. According to the European Commission, the strength of the industrial sector has lifted UK economic confidence to a six-month high with Eurozone industrial confidence at its highest since 1985, but for how long will this continue?