Global recovery: the consumer isn't buying it

Peter Warburton/Tom Traill - 15 January 2020

The good news is that real annual retail sales growth is running at around 10 per cent in Armenia and Ukraine and at around 5-6 per cent in Hungary, Serbia, Malaysia and Vietnam. The bad news is that almost everywhere else, retail sales volumes are dribbling along. In Hong Kong, Chile and Venezuela, sales are plummeting. Outside of emerging market economies, there is very little evidence of the consumer recovery that we routinely associate with central bank easing. What are the likely explanations of consumer reticence and risk aversion?

In figure 1, we reveal a calculation of global nominal retail sales growth, based on standardised data for 47 countries and representing more than 90 per cent of global GDP. Apart from the aberration of the global financial crisis (GFC), nominal – and real – retail sales growth is at its weakest for 20 years (figures 2 and 3). In nominal terms, global sales are 3.9 per cent higher year-on-year, comprising 2.5 per cent for developed and 7.7 per cent for emerging economies. The corresponding figures in real terms are 1.4 per cent (global), 1.2 per cent (developed) and 2.5 per cent (emerging).

Three credible explanations of weak retail sales growth spring to mind. First, the gentle acceleration of the wage bill across the largest developed economies petered out in 2019 and has begun to reverse. Employment by headcount is still rising but by hours worked, the trends are softer. Nominal earnings growth has failed to gather momentum in the context of tight labour markets. Compositional effects have been negative; overtime premiums have largely disappeared, and the proportion of tenured workers has fallen. These adverse factors are likely to become more pronounced as the global profits downturn takes hold.

Second, the intended stimulus to consumer spending from very low – or even negative – interest rates on bank loans is failing to materialise. Intelligent credit scoring algorithms have become much more effective in denying access to marginal borrowers, for whom credit conditions are already tightening in US and the EU. Cheap credit continues to be offered to those who have no need of it and little inclination to accept it. Rising default rates on auto loans and credit cards are triggering a re-pricing of consumer credit.

Third, the flipside of low interest rates on bank loans is negligible interest offered on bank deposits. A combination of the loss of interest income to older savers and the difficulty of accumulating capital for younger savers has brought about an increase in the household savings rate at the expense of consumer spending. Zero or negative interest rate policy is detracting from the ability and desire to consume by young and old alike, especially in Europe.

Conventional monetary policy is still working normally in many countries, which helps to explain why there has been an improvement in spending growth for emerging economies over the past few months. However, in DM, where most monetary policy experiments have occurred, policy traction is poor and policy transmission is tenuous. Wealth effects on consumption, where they are found, discriminate in favour of property wealth rather than financial wealth. The revaluation of the equity market is an unreliable channel of stimulus to consumer spending.

The outlook is for consumer retrenchment in 2020, with deceleration in developed economy nominal and real spending.


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