The UK economy may be more resilient than thought in the face of rising inflation, higher borrowing costs and banking turmoil, according to data released on Friday showing that retail sales and consumer sentiment were up and business activity had expanded.
The volume of retail sales, or the amount of goods sold in UK shops, increased 1.2 per cent in February, after a 0.9 per cent jump the previous month according to the Office for National Statistics. Analysts had predicted a smaller rise of 0.5 per cent. It was the first time since August 2022 that sales rose to pre-pandemic levels.
Meanwhile, the closely watched monitor of private sector health, the S&P Global’s flash UK composite purchasing managers’ index, eased to 52.2 in March from 53.1 in the previous month. Despite the drop, it was still above the 50 mark, signalling that a majority of businesses had reported an expansion.
The data suggest some economic resilience in the face of the multiple headwinds. On Wednesday official figures showed that UK inflation unexpectedly rose to 10.4 per cent in February, up from 10.1 per cent the previous month and not far below its October peak of 11.1 per cent.
The following day, the Bank of England raised interest rates by a quarter of a percentage point to 4.25 per cent, marking the central bank’s 11th consecutive increase since December 2021.
Global banking turmoil, with the collapse of Silicon Valley Bank and the hasty merger of Credit Suisse and UBS, which is likely to make banks more cautious about lending, added to the challenges.
Yet the figures published on Friday are “consistent with the economy faring remarkably well” in the face of those challenges, said Gabriella Dickens, economist at Pantheon Macroeconomics.
Chris Williamson, chief economist at S&P Global Market Intelligence estimated that the PMIs were consistent with a 0.2 per cent expansion of the UK economy in the first quarter — an improvement from the stagnation of the previous three quarters.
Bank of England governor Andrew Bailey said in a BBC interview on Friday that he expected Britain would now avoid recession this year. “The prospects for the economy in terms of growth are better, considerably better,” he said.
Bailey also urged businesses to assume lower inflation when setting prices.
“But what I would say, please, is that when we are setting prices in the economy and people are looking forwards, we do expect inflation to come down sharply this year. And I would just say, please bear that in mind,” he said.
His comments came as business costs grew at their slowest pace since March 2021, according to the PMI report. Survey respondents were the most optimistic about their business prospects since March 2022, which Williamson said showed “sentiment has been little affected so far by the banking sector woes”.
Separate data by the research company GfK showed that UK consumer confidence ticked up 2 points from the previous month to a one-year high of minus 36 in March.
However, retail sales were still down 0.3 per cent in the three months to February compared with the previous three months, following a sharp contraction in December.
“The broader picture remains more subdued, with retail sales showing little real growth, particularly over the last 18 months with price rises hitting consumer spending power,” cautioned ONS director of economic statistics Darren Morgan.
Moreover, sales were boosted by discount department stores and food shops as cost of living pressures led consumers to cut back on takeaways or eating out, according to the ONS.
“The coming months may still be a struggle for retailers,” warned Ashley Webb, UK economist at Capital Economics. “Although the worst of the falls in real household incomes are in the past, the full drag on activity from higher interest rates has yet to be felt.”
