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UK retail sales beat forecasts, all eyes on Federal Reserve

Ben Brettell

The UK consumer continues to show remarkable resilience, with retail sales in August blowing economists’ forecasts out of the water. From Ben Brettell, Senior Economist, Hargreaves Lansdown.

Retail sales rose 1.0 percent on the month, against expectations for a much smaller rise of 0.2 percent. Increased spending in non-food shops like department stores and DIY outlets were behind the dramatic improvement. Sterling jumped sharply on the news, gaining three-quarters of a cent against the dollar and half a cent against the euro. Spending has defied expectations of a slowdown since the Brexit referendum, and currently seems to be holding up despite weak wage growth and above-target inflation.

This could bode well for economic growth – the UK economy is heavily reliant on the consumer, and economists had expected falling real incomes to eventually translate into weak retail sales. If this fails to materialise the economy could see a stronger second half to the year, though there are also growing concerns over the level of household debt, which is fuelling continued consumption in the absence of rising real wages.

But interesting though they are, the retail sales numbers must play second fiddle today to the US Federal Reserve’s policy decision this evening. Financial markets are watching with interest to see if Janet Yellen and co decide to start unwinding the easy money policies the Fed has pursued since the financial crisis. Yet a reaction akin to 2013’s ‘taper tantrum’ looks unlikely.

The Fed has more clearly telegraphed its move in advance this time around, and markets are more likely to view the withdrawal of stimulus as positive news that the patient is well enough to be weaned off the medication.

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