British and American consumers have more in common than either would probably care to admit. The only uncertainty would seem to be whether that end is going to be abrupt or gradual. For the time being, we would lean towards a more gradual moderation being most likely on both sides of the Atlantic.
Of the two, it is the UK household sector that has been showing much softer signs of late. While the short-term trend of much of the data is worrying - and reinforces our view that interest rates have already peaked at 4.75% - we would still caution against an over-reaction to the downside. In general, UK fundamentals are sound: business investment is moving along nicely, helping keep the level of employment high (though, as we discussed last week, it is not getting higher); and inflation remains very subdued, so there is no need for the MPC to introduce the sort of punitive interest rates that have been necessary in previous cycles. Indeed, it is the central theme of our medium term expectation for monetary policy that the peak in interest rates will align more closely with the cyclical peak in demand growth. The key reason for this being the reduced requirement for the central bank to continue tightening policy in pursuit of inflation once growth momentum has faded.
Evidence this week continued to pile downward pressure onto market expectations for UK economic growth. The first survey indication of September retail sales, from the CBI, was surprisingly weak for the third consecutive month. The 'reported sales' balance has fallen from as high as 51 in May to September's -9. As the chart in the attached ISIS Economic's Weekly shows, this series' correlation with official data is poor on a month to month basis, but it does provide a decent steer on the general trend. And after failing to recover at all from the Summer's weakness, this tends to suggest retail sales growth is about to soften in a more material fashion. Such behaviour would, of course, be consistent with the path suggested by the increase in real base rates over the past 12 months - up by 2% points, the sharpest one-year tightening since 1990 (so much for the gradual approach!). Furthermore, consumers themselves are reporting more difficult times, with the GfK consumer confidence index slipping to -7 in September. Outside of the period immediately prior to the invasion of Iraq, this was the most depressed sentiment report in 6 years. Within the survey, households' perception of their own financial prospects deteriorated to the extent that both spending and saving intentions fell, suggesting the reduced financial wherewithal imposed by dearer credit is beginning to bite.
A gloomier mood has also been apparent in recent US household activity and sentiment data. Following a disappointing consumer confidence report, which showed sentiment falling in September when it had been expected to rise, the weekly indicator of US chain store sales (also shown in the attached Economic's Weekly) registered another drop in the final week of September data. On an annual basis, sales growth has decelerated to 3% yoy at the end of Q3, from a high of 8% back in the first quarter. With personal disposable incomes currently expanding at just 1.6% yoy, it seems likely that spending growth will continue to soften into the year-end.
