UK retail sales had a bangish March, jumping 1.1% m/m and a whopping 6.7% y/y, according to the Office for National Statistics. Headlines had a field day, marvelling at shoppers’ ability to “ignore Brexit chaos,” “defy Brexit turmoil” and hit the shops “unfazed by Brexit.”[i] This does seem like a testament to the nation’s stiff upper lip. However, whilst we don’t share the widespread view of Brexit (particularly a no-deal Brexit) as automatic economic or equity market doom, we do wonder if March’s sales jump is really a case of shoppers defying conventional wisdom—or if it is instead another instance of Brits prepping for a no-deal Brexit that didn’t end up happening.
Take a stroll down memory lane and recall mid-March. Politicians were nowhere close to a Brexit deal, and the 29th of the month loomed as the date Britain would supposedly crash out of the EU. Headlines had warned you for months that UK residents could lose access to popular continental European products, not to mention necessities like medicine. In the face of such warnings, stocking up likely seemed wise and logical! It wouldn’t surprise us if many shoppers hit the high street with such a mindset.
This is just one speculative interpretation, of course, but it wouldn’t be the only instance of stockpiling. For months, IHS Markit’s Purchasing Managers’ Indexes (PMIs)—monthly surveys tracking broad business activity—for the UK showed soaring inventories. March’s manufacturing PMI release opened with this statement: “The impact of Brexit preparations remained a prominent feature at manufacturers in March. Efforts to build safety stocks led to survey-record increases in inventories of both purchases and finished products. Trends in output and employment also strengthened as stockpiling operations at clients led to improved inflows of new work.”[ii] In other words, pre-Brexit scrambling and hoarding likely deserved most of the credit for the manufacturing PMI hitting a 13-month high.
Rising activity as factories and shoppers prepped for a no-deal Brexit can be positive in the here and now, likely boosting near-term growth. But it may come at a cost. Most of this activity would likely have happened anyway—perhaps just later in the year. When businesses and consumers are trying to beat a certain landmark date, it is normal to pull demand forward, which creates a lull later in the year as everyone works through that inventory glut, also known as a supply overhang. We saw it in Japan five years ago, as consumers raced to beat a sales tax hike.[iii] Consumption jumped in the months before and fell for a while after. We saw it in Europe last year, as car buyers front-ran new EU emissions standards, sending vehicle registrations surging in the summer, only to fall sharply after the rules’ September implementation.[iv]This doesn’t mean a full-on UK slump will surely happen later this year. But we have written before of the possibility that if businesses expended significant resources prepping for a no-deal Brexit that didn’t happen, it could cause a hangover in the ensuing months. With Brexit now delayed potentially as far out as Halloween, and uncertainty over what that Brexit will look like lingering, it wouldn’t shock us if economic activity quieted a bit as businesses returned to their long-running wait-and-see game whilst slowly working through the inventory build. Nor would it shock us if shoppers took a bit of a breather after a March frenzy of prepping for a no-deal Brexit that didn’t happen. This isn’t a prediction, but rather, a potential scenario we would encourage investors to bear in mind, particularly if data indeed weaken.
[i] Headlines clipped from The Guardian, Bloomberg and Financial Times.
[ii] Source: IHS Markit, as of 18/4/2019. IHS MARKIT / CIPS UK Manufacturing PMI for March, released April 1, 2019.
[iii] Source: FactSet, as of 18/4/2019. Statement based on Japanese retail sales, 31/12/2013 – 31/12/2014. The consumption tax hike took effect on 1/4/2014.
[iv] Source: FactSet, as of 16/4/2019. Statement based on EU new passenger car registrations, March 2018 – March 2019.
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