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5 "Tells" that the Stock Markets Are About to Reverse

UK Real Retail Sales Deflationary Trend Continues

Economics / UK Economy Nov 20, 2008 - 11:51 AM GMT

By: Nadeem_Walayat

Economics Best Financial Markets Analysis ArticleThe official monthly retail sales data again demonstrated the inbuilt trend inaccuracy by reporting just a 0.1% drop for October 2008, up 2% on the year and in the face of the UK economy slumping fast into recession. Whilst the mainstream media mistakenly jumps on the smaller than expected decline, I refer readers to the two graphs below, one of the official retail sales data and the second of the inflation indexed and trend adjusted retail sales which more accurately reflects the current true state of distressed retailers than the month to month gyrations of official data that proves so confusing to mainstream market watchers.


UK retail sales - october 2008

UK Real Retail Sales - Trend Adjusted

Whilst official data suggests positive retail sales of 2% year on year as though everything remains rosy on the high streets, the real state of the UK high street as per trend and inflation adjusted data illustrates a slump in retail sales activity that is contracting at the rate of -1.8% year on year and reflects the actual state of the retail sales market. This trend is expected to continue deteriorating for the duration of the recession as more retailers report losses and in fact go out of business.

Marks and Spencer's have today announced a panic one one day sale, cutting all prices by 20% and many stores staying open until midnight following hard on the heels of other stores also announcing deep discounts and short-term sales so as to increase turnover as consumers cut back on spending in the face of soaring inflation that has eaten away into disposable incomes.

More Bargains Coming for Shoppers

The outbreak of panic sales of 20% plus off marks just the first stage of the consumer bust of 2009. Shoppers can expect more discounting the closer we get to Christmas, followed by deeper cuts during the January sales and by March / April 2009 the expectation will be for the 70% to 80% price cuts in the CLOSING DOWN SALES as many bankrupt retailers go bust.

UK Inflation CPI Falls Sharply as Economy Heads for Deflation

Earlier this week, UK inflation as measured by the CPI slumped by the largest amount since the series began in 1997, falling from 5.2% to 4.5%. This follows hard on the heels of the Bank of England's panic 1.5% interest rate cut earlier in the month which was accompanied by BOE statements that UK economy would contract by 2% GDP during 2009, that puts the UK on target to experience a worse recession than that of the early 1990's as Gordon Browns boom turns to bust. The RPI measure which the BoE also warned was heading towards deflation i.e. a negative RPI during 2009 fell sharply from 5% to 4.2%.

UK Interest Rates

The Bank of England's Monetary Policy Committee will have been aware of the sharp fall in inflation at the earlier November meeting and thus contributed towards the decision to cut interest rates by an near unprecedented 1.5% from 4.5% to 3%. Interest Rates are targeting a trend to below 2% by mid 2009.

Deflation 2009 Followed by Stagflation in 2010

Deflation has not been seen in the UK since the 1930's Great Depression. The effect of deflation are worse than inflation as a deflationary spiral brings investment to a halt and the value of debts increases in real terms as wages contract, leaving borrowers worse off than people have experienced during the previous recessions of the post war period. The deflationary trend of late 2008 and 2009 was first warned of by myself way back in March 2008 - DELEVERAGING- Gold and Commodities Teetering on the Brink of a Bear Market? , the trend for which is now coming to pass as virtually all commodities have slumped following their forecast summer peaks.

Bankrupting Britain

Gordon Brown is homing in on the 2010 June Election deadline and has literally thrown all of the golden rules and prudent economic management handbooks into the dustbin with the consequence that the huge surge in government spending puts Britain on course to resemble a big version of Iceland. We have long left behind the £2 billion tax give away in advance of the May 2008 local and by elections. Now we are looking at money printing on a scale not seen of in our lifetimes, as UK debt is set to explode form the 40% of GDP limit to more than 100% of GDP by the June 2010 election.

I warned way back in April that the government debt would soar to above 60% of GDP by the end of 2009, at the time that seemed overly pessimistic where the consensus still went along with the view that the government would hold to the 40% GDP debt rule, now the consensus is again underestimating the amount of government borrowing that will take place during the next 12 months. I would not be surprised if a year from now UK debt was on target to hit 200% of GDP.

THIS IS HIGHLY INFLATIONARY ! Make no mistakes about it, the UK is heading for many years of stagflation following the deflation of 2009. But in the meantime we have to contend with deflation which is as a consequence of the economic bust that at this point in time looks set to put the UK on course for a recession on par with the early 1980's

For the latest in depth analysis and forecasts on the UK economy, interest rates and housing market subscribe to our always free newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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