As the UK has moved into 2025 the economic news has not been good. Official statistics by their very nature are always behind the times. But the latest monthly GDP figures for September and October both showed 0.1% declines and that followed a third quarter for 2024 which was revised down to 0% growth. So it was welcome to see this from the retailer Next this morning.
Next’s full-price sales rose 6 per cent in the nine weeks to December 28, or 5.7 per cent when stripping out the impact of its end-of-season sale being timed differently to the previous year.The figures exceeded Next’s previous guidance of a 3.5 per cent increase on the previous year and will push the chain’s pre-tax profit to just over £1bn for the year to January.
Next’s shares rose 2.7 per cent in early trading. ( Financial Times)
It provided a bit of hope for the retail sector and added to the better news provided by the supermarket Aldi yesterday.
Aldi has recorded its best festive season ever in 2024, with sales topping £1.6bn in the month before Christmas.
Sales at the grocer grew 3.4 per cent year on year, while its seasonal offering rose 10 per cent and its premium range jumped by 12 per cent compared to 2023. ( City AM)
Of course individual retailers may have done relatively well and whilst Next produced good figures it also warned about the Budget changes made by Chancellor Rachel Reeves.
The FTSE 100 company on Tuesday laid out the impact from October’s Budget, when chancellor Rachel Reeves increased the amount employers contribute in national insurance and also lowered the earnings threshold at which they start paying it………Next said the chancellor’s move to lower the earnings threshold at which businesses start to pay NI contributions from £9,000 to £5,000 was one of the most significant costs, totalling £20mn. ( Financial Times)
Whilst there is some PR spinning below the central message is that it will add to inflation.
It said it would try to offset these “unusually high” costs through operational efficiencies and by increasing prices by 1 per cent, “which is unwelcome, but still lower than UK general inflation”.
They also expect it to weaken the next year.
The retailer expects profit growth of 3.6 per cent for the year to January 2026, down from an estimated 10 per cent in the 12 months to January 2025.
So the Christmas good news becomes a lot more downbeat as we see that partly due to the Budget changes Next expect more inflation and a weaker performance.
British Retail Consortium
There was a bit of hope here too.
The latest @the_brc @KPMGUK retail sales figures for December are out, showing a 3.2% (nominal, nsa) increase in total retail sales compared to the previous year, boosted by Black Friday spillover and last-minute festive spending.
But once you allow for inflation at over 2% then the real growth becomes rather marginal. Below are the areas which did particularly well.
Non-food sales climbed 5.3% (year-on-year), led by strong demand for beauty products, AI-enabled tech, and jewellery—popular picks for Christmas gifts. Health and beauty continued to perform well, supported by sales of beauty advent calendars and seasonal remedies.
But the overall message from chief economist Harvir Dhillon switched to more downbeat as he looked ahead.
Despite the December rebound, 2024 retail sales growth remained subdued overall, with the golden quarter delivering only marginal gains. Rising costs, including higher National Insurance contributions and the new packaging levy, are set to weigh heavily on the sector in 2025.
PMI
There was not a lot of cheer from the S&P Global survey yesterday with the best bits being these.
Marginal increase in business activity…… While most
parts of the UK service economy noted weak demand and
cutbacks to client budgets, there remained pockets of
strong growth in areas such as technology services.
Services registered 51.1 which once we added the weak manufacturing sector led to a Composite reading of 50.4. So in literal terms some marginal growth but as the numbers are not accurate to decimal points the message is one of stagnation.In fact we are quickly back facing the stagflation risks I warned about last Friday.
“Rising input price inflation added to the gloomy nearterm outlook for service providers, with overall cost
pressures reaching an eight-month high in December.
Prices charged inflation meanwhile intensified at the end
of last year and remained well in excess of pre-pandemic
trends.”
In fact we see that the October Budget both raised inflation when it was rising and weakened growth as it was falling.
Concerns about the impact of rising payroll costs,
alongside a general unease about the climate for
business investment, were reported as the main factors
weighing on prospects for growth in 2025.
Even worse we see this too.
“Faced with subdued demand conditions and hikes to
employment costs, many service providers opted to
curtail their staff hiring and delay backfilling roles in
December. Nearly one-in-four survey respondents saw
an overall decline in their payroll numbers. Excluding
the pandemic, this represented the steepest pace of job
shedding for more than 15 years.”
This is significant in several respects. Firstly employment has overall been a strength of the UK economy in the credit crunch era and we have not had so many of them.That looks ominous for economic growth in 2025. Next up we have seen the Bank of England concentrate its analysis on the labour market and with the official data in rather a mess due to the problems with the Labour Force Survey, it will be placing more emphasis on reports like this. There is an irony here as whilst so many messages at the moment point to higher interest-rates this one may bring it nearer to cuts. Along the way we see that for once economics 101 has done well as the employers tax rises in the Budget cause both inflation and job cuts.
There was a little more hope from this morning’s construction release.
The headline S&P Global UK Construction Purchasing
Managers’ Index™ (PMI®) – a seasonally adjusted index
tracking changes in total industry activity – registered 53.3 in December, down from 55.2 in November and the lowest for six months. “
But even that is weakening….
Bond Yields and Debt Costs
As someone who has spent years and indeed decades working in the bond market I realise it is rarely a good sign when it hits the news. Yet I have just pointed this out on social media.
UK ten-year yield reaches 4.7% Klaxon.
This has two clear effects and the first is it symbolises higher debt costs for the UK. There is a literal cost this morning as the issuance below will cost us 5.2% a year for many years.
The United Kingdom Debt Management Office (“DMO”) announces that the auction of £2,250 million of 4⅜% Treasury Gilt 2054 (ISIN Code: GB00BPSNBB36) has been allocated as follows:
Next up is that this trend will feed into mortgage rates over time.I discussed in the comments section yesterday how banks have cut some mortgage rates presumably on the back of having raised cheaper funding previously. But such things must be running out as we see that with some perspective now as a couple of months or so have passed that the October Budget has been followed by higher bond yields in the UK. That is not a little awkward when this was your message.
>Two years ago today, Liz Truss’s mini budget crashed the economy and sent your mortgage spiralling.Rachel Reeves as Chancellor, Labour will put money back in the pockets of working people.
Comment
There will be a boost from the extra spending in the Budget for 2025 which was estimated at 0.7% of GDP by the Bank of England. The problem with government inspired expansion and a struggling private-sector is that once we allow for higher debt costs then more tax rises look likely.These will only start the same spiral so sadly it looks like stagflation is on the menu for 2025.
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