Real consumption growth will inevitably slow

The stagnation in retail sales in July was not entirely surprising. Following the 4.2% annualised surge in real consumption in the second quarter, it was inevitable that spending growth would ease to a more sustainable pace. The fundamentals have also deteriorated over the past several months. In particular, real income growth has slowed markedly since the start of the year, which means that much of the surge in spending in the second quarter was funded by a decline in the saving rate, leaving less scope for spending to continue outpacing incomes. There are still good reasons, however, to expect consumer spending to continue growing at a decent pace over the months ahead. Banks are continuing to loosen standards on mortgages and other consumer loans while consumer confidence remains at a high level. On balance, we expect spending growth to slow to a more sustainable pace over the second half of this year, coming in at 2.7% for 2016 as a whole.