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May 23, 2022

Great British Belt Tightening - Flexport Weekly Economic Report

Chris Rogers

Chris Rogers

Supply Chain Economist

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Rising inflation and interest rates are suppressing consumer confidence and cutting into retail sales on both sides of the Atlantic. U.K. consumer confidence hit the lowest since the early 1970s and retail sales have trended downwards for eight straight months as of April.

In Focus - Consumer Malaise is a Transatlantic Phenomenon

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Stock markets have been roiled this week by weaker-than-expected sales by U.S. retail firms. Rising inflation has led consumers to cut their spending on discretionary goods. Is this just a U.S. phenomenon?

Sadly not. Annual consumer price inflation (CPI) in the United Kingdom reached 9.0% in April, the fastest rate of price increases since the series was instituted in 1988. The Retail Price Index (a simple, not geometric average that is more susceptible to shifts in commodities) reached its highest since August 1981.

The Bank of England has warned that inflation could rise to 10% before the end of 2022, leading it to start tightening monetary policy by raising its benchmark borrowing rate to 1.0%. That already led borrowing costs higher with mortgage rates in April reaching 2.4% compared to 1.6% in January (most U.K. mortgages are floating-rate).

Wages, meanwhile, have only increased by 4.0% in the past 12 months. The resulting drop in real disposable incomes has dragged GfK’s consumer confidence level to its lowest since the survey began in 1974. That includes a slide in purchasing intent for large items.

As a result, retail sales published this week showed a 0.3% dip in weekly volumes sold in the three months to April 30 versus the prior three month period to Jan. 31 (the Office for National Statistics’ preferred trend measure) as shown in the chart above. That continued an eight-month downward trend established in September 2021.

Sales by online retailers fell by 6.4% on a trend basis, while food stores declined by 1.7%. The latter may reflect the impact of higher food costs. Household goods stores (durables such as appliances and furniture) increased by 2.0%, though that may reflect the completion of purchases that had been held up by logistics challenges.

Still, at least Queen Elizabeth II’s Platinum Jubilee on June 2 gives consumers a reason to celebrate - with a remarkably complex dessert - before tightening their belts further.

(The Weekly Economic Report will be published on Tuesday next week as we’ll be observing Memorial Day on May 30.)

Latest Flexport Metrics & Research

The Flexport Ocean Timeliness Indicator for Transpacific Eastbound routes fell by 1 day to 102 days, its lowest since November 7. Flexport’s Air Timeliness Indicator for TPEB stayed the same at 11.4 days.

In other research we’ve published a guide to U.S Section 301 duties on imports from China, including their history, impact on trade flows and potential actions by the Biden administration to address inflation.

Economics Data

Preliminary U.S. retail sales data showed a slowdown in growth to 0.9% sequentially in April compared to 2.4% on average in Q1’22. That partly reflects lower gasoline prices in April though excluding fuel and motor vehicles still showed growth of 0.3% in April versus 2.5% in Q1. It should be noted though that these figures are nominal and CPI was 0.3% in April.

  • Among store types there was slower growth in electronics and the first dip in building material sales since June 2021.
  • More details were provided for inventory / sales ratios after preliminary figures published April 27. While the headline figure is well below pre-pandemic levels, individual sectors are rising. The Building Materials sector reached 1.84x, the highest since November 2019, while Furniture and General Merchandise stores are all inline with their pre-pandemic levels.

U.S. Industrial Production increased by 1.1% sequentially in April and by 6.4% year over year. Growth was led by production of business equipment (up 8.8% year over year) while consumer goods manufacturing only improved by 4.4%. A recovery in automotive manufacturing was a major driver of the improvement.

  • Manufacturing capacity utilization improved to 79.0%. While that was 0.5% below the long-term (1972-2021) level; it was the highest since December 2018.
  • The outlook may be less positive. The Philadelphia Federal Reserve’s manufacturing survey indicated that firms’ expectations for future general activity fell to its lowest in over 13 years in May.

U.S. housing market data showed a weakening from March to April, but strength relative to 2021. In seasonally-adjusted terms, housing starts fell 0.2% from month to month, but were up 14.6% from April 2021. Building permits were down 3.2% for the month but up 3.1% year over year.

Consumer price inflation (HICP) in the EU reached 8.1% year over year in April, up from 7.8% in March. Rising energy and food prices were the major contributors and likely reflect ongoing disruptions from the conflict in Ukraine (see more below).

  • EU flash consumer confidence was down slightly, while the narrower Euro Area confidence rose a bit. Both numbers remained well below their long-term averages.
  • Retail sales in the Eurozone fell 0.4% sequentially in retail terms in March after a small improvement in March on lower automotive fuel sales and online purchases.
  • EU trade with the rest of the world surged 25.9% higher year over year in March, led by a 40.4% rise in imports. Energy commodities played their part, with imports of natural gas and oil from Russia driving imports to the EU from Russia up by 108% year over year to a record high of 23.4 billion euros.

Japanese GDP fell by 0.2% sequentially and by 1.0% on an annualized basis in Q1’22. Private consumption was unchanged sequentially while government spending rose. Export growth of 1.1% was offset by soaring imports during Q1.

  • Japan’s international trade activity climbed 20.2% year over year in April, helped by a commodity-price assisted 28.2% rise in imports. Export growth of 12.5% in yen-terms was slower than the previous two months and was also helped by surging exports of refined fuels and organic chemicals.
  • __Indonesia__’s commodity-dominated exports surged 48% higher year over year in April to set a record helped by coal, nickel and palm oil, though the latter have declined after restrictions linked to rising prices for food globally.

Politics & Regulations

The European Commission has outlined a plan to cut all imports of Russian oil and gas by 2027 as well as deliver environmental commitments through a mixture of energy savings, investment in renewables and importing of fossil fuels from alternative sources.

  • Delivering such a plan is far from simple - legislation at the European Parliament and agreement of member states is needed. The existing plan to embargo Russian oil faces challenges from member states’ approval, leading the U.S. to suggest alternative measures such as price caps or tariffs.
  • Separately, the European Parliament has called for an extension of the proposed Carbon Border Adjustment Mechanism to include a wider range of products. That’s effectively a tariff on imports from countries that don’t have a comparable carbon permit pricing system.

The European Commission’s roadmap also includes a potential cap for natural gas market prices in the event that supplies from Russia are disrupted. To reduce the risk of disruptions the EU has ruled that suppliers are allowed to pay using euro or dollar bank accounts in Russia, but not with rubles from international accounts.

  • The global escalation in commodity prices linked to the conflict in Ukraine has led to an increase in natural gas costs for U.S. industrial users including the chemicals and plastics industries.

The U.K. will pass legislation to unilaterally change the Northern Ireland Protocol segment of trading relations with the EU. That follows ongoing disagreements with the EU. The U.K. is proposing a simpler “green-lane, red-lane” approach which will reduce customs formalities for shipments from the mainland to Northern Ireland.

  • The EU, meanwhile, has stated that it will take all available measures under the Trade and Cooperation Agreement, raising the prospect of tariffs and other trade restrictions.

The EU and U.S. meanwhile have carried out a new round of Trade & Technology Council talks which have included an agreement to limit competition in offering subsidies for onshoring semiconductor manufacturing.

Supply Chain Update

A survey of British firms’ reshoring intentions shows around 40% of manufacturers have increased their sourcing from U.K. firms in the past two years with Brexit and slowing global logistics cited as major reasons. A similar number of firms expect to increase U.K. sourcing in the next two years too.

The Ukraine conflict has also caused significant upheaval and inflation for global food supply chains. That led the G7 to propose alternative routes for exporting wheat from Ukraine. That comes as India has announced a ban on exports of wheat, with isolated exceptions.

  • Mexico will reportedly cut its tariffs on imports of food to help offset rising food price inflation.

The Biden administration has triggered the Defense Production Act to boost the availability of infant formula. That includes a requirement for U.S. manufacturers to focus on the U.S. market - with negative consequences for Canada - and will include the U.S. military flying in supplies. The FDA will also relax import rules. Corporations are already acting with the increasing use of airfreight to bring product in from overseas and scaling up production in the U.S..

Chart of the Week - Like a Rock, in a Bad Way

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Last week Chinese semiconductor manufacturer SMIC stated that consumer demand for PCs and phones “dropped like a rock” recently and that some of its customers “are holding more than five months” of inventory. North American smortphone shipments reportedly increased by 2.7% year over year in Q1’22 but included “heavy discounting and high trade-in values” to encourage sales.

Global exports of laptop computers and smartphones were worth $410 billion in 2019, or 3% of the value of global non-commodities trade based on UN Comtrade data. As shown in the chart above, Chinese exports of computers and telecom equipment fell by 5.1% and 7.3% year over year respectively in April.

That followed a steady improvement in the first quarter, though the business is highly seasonal and sensitive to supply chain interruptions - such as factory closures - and the success or otherwise of new product release. Overstocking levels may put a cap on trade in such goods during the off-peak shipping season.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

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