About That Gangbusters UK Retail Sales Report

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, marveling 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 Brits’ legendary stiff upper lip and history of keeping calm and carrying on through uncertain times. However, while we don’t share the widespread view of Brexit (particularly a no-deal Brexit) as automatic 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.

Put yourself in the mind of a UK shopper, if you will. It is mid-March, politicians are nowhere close to a Brexit deal, and the 29^th of the month looms as the date your country will supposedly crash out of the EU. Headlines have warned you for months you could lose access to your favorite continental European products, not to mention necessities like medicine. So, what do you do? Stock up, of course! Time to hit the high street and nab what you can.

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) for the UK showed soaring inventories. March’s manufacturing PMI release opened thusly: “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 deserved nearly all the credit for the manufacturing PMI hitting a 13-month high.

Rising activity as factories and shoppers prepped for a no-deal Brexit is a nice thing in the here and now, likely boosting near-term growth. But it comes at a cost. Most of this activity would have happened anyway—just likely 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 everyone raced to beat a sales tax hike. 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, only to fall sharply after the rules’ implementation.

Not that we are predicting a full-on UK slump later this year. But we warned earlier 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 while 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! Just, you know, a friendly “maybe keep this in mind.”