- Britain’s economy will not suffer any huge shock from Brexit, rather a slow decline.
- A drop in consumption from regular Brits will be the key driver of that slowdown.
- Inflation has risen, while wages have not, squeezing the average Brit hard.
- The situation won’t be getting better any time soon as inflation is expected to rise, and wage growth will stay weak.
LONDON — The British consumer has a problem.
Fourteen and a half months after the vote to leave the European Union, and the millions of UK consumers are feeling the economic impacts of the decision.
For a long time the powerhouse of the UK’s economy, the appetite of the British consumer is now starting to stutter as the twin forces of rising inflation and stagnant wage growth squeeze the economy, forcing up the costs of living faster than the average pay packet.
Inflation — which pre-referendum had ticked along at less than half of 1% — has jumped thanks to the pound’s depreciation against both the dollar and the euro after the vote. At the last reading, inflation was 2.6%, but many expect it to pass above 3% before the end of the year.
By contrast, wage growth was just 2.1% when measured as part of the Office for National Statistics’ latest job market figures released in August.
Slowing consumer spending and overall household consumption are widely acknowledged to have been behind the slowdown in the wider British economy this year, which has pushed the UK to the bottom of the pile in terms of GDP growth in major economies.
“The key to our view of weakening UK growth this year was slowing household consumption,” Deutsche Bank’s Oliver Harvey wrote in a note to clients this week.
Signs are that this is not going to change any time soon, and the UK is likely to experience a protracted slowdown, with the economy operating at a capacity much lower than might have been expected had Britain chosen to stay in the European Union for several years.
In a recent interview with Business Insider, for example, Peter Dixon, chief UK economist at Commerzbank argued that the economy should expect a loss of output compared to if Britain had stayed in the EU of more than 2% by end of 2018. This phenomenon is likely to continue over a much longer horizon, gradually sucking life from the economy.
How is consumer spending slowing?
Consumer goods are not just the obvious essentials like groceries, but expand to everything from cars to fridges to TVs to holidays. Basically, if you can buy it, it counts as a part of consumer spending.
The first facet of spending to suffer in a downturn is often the purchase of new cars. That’s because while cars are an essential item for many people, their lives can be extended a lot more easily than many items.
Buying a new car is a huge outlay, while getting it fixed is pricey, but generally not prohibitively so. When times get tough, people tend to delay buying a new vehicle, which in turn shows up in official data about the number of new cars being registered.
Data released on Tuesday showed that the number of new cars registered privately fell sharply in August, continuing a trend that has been going for the last two or so years, but has intensified since the referendum.
“Private new car registrations fell 9.9% year-over-year in August, much worse than the 5.2% average decline over the previous twelve months,” Samuel Tombs of Pantheon Macroeconomics wrote on Tuesday morning.
“Low consumer confidence and deteriorating affordability due to the weak pound suggest that the mid-2010s boom in car sales has run out of mileage,” he added.
Here’s the chart:
Next to suffer is often bigger ticket household items like sofas and televisions where, like cars, their lifespan can be extended, so consumers are less inclined to replace them when times are tough. Deutsche Bank’s analysis this week showed that both its key trackers of big ticket item spending are subdued right now, and could get worse, as the chart below shows:
Once they have stopped buying furniture and electronics, Brits will next sacrifice going on holiday. This has started to happen, although not to the extent that occurred during the financial crisis.
“UK tourist spending has tended to be well correlated to overall consumption, although it only makes up a small amount of overall demand. Monthly data on UK visits overseas track this well. Visits abroad have slowed much less than after the 2008 crisis, despite the weakness in the exchange rate, but are tracking lower,” Deutsche’s Harvey wrote.
Things are set to get worse
There are two reasons to suggest that the consumer slowdown which is dragging on the British economy is likely to get even worse. First of all, inflation — by almost all accounts — has not yet hit a post-Brexit vote peak, and could extend past 3% later this year. Even higher prices will squeeze consumers harder and likely worsen the consumer slowdown.
Secondly, wage growth — despite the arguments of the Bank of England — does not look like it will pick up any time soon, thanks largely to fundamental shifts in the way Britain’s labour market functions.
Getting a pay rise has become more difficult. Britain may have a lot of jobs — more than 32 million people in work to be precise — but few are getting above inflation salary increases.
For example, those on so-called zero-hours contracts may find it tough to get a pay rise when their boss is not even obliged to even give them any hours of work.
This is exacerbated by the fact that workers in the 21st century are far less likely to be part of a union than in, and as a result do not have the same power to force employers hands as they had during the later half of the 20th century.
There has also been another big, more recent shift, a shift towards the so-called “gig economy,” a class of workers who are technically self-employed and paid per “gig,” typically working in service-style roles like deliveries and taxi-driving, often without set hours and with work assigned via a smartphone app.
Gig economy workers tend to have a much greater deal of flexibility in the way they work, but in turn, sacrifice many of the protections they would receive if they were to have formal employee status.
Boosting wages for gig economy workers can also be hard. Companies in the gig economy like Uber, Deliveroo, and Hassle set their rates centrally and given that workers are effectively their own bosses, asking for a raise and in turn stimulating wage growth that way is virtually impossible.
Until policymakers can work out how to get wages growing faster than inflation, the British consumer is likely to be a drag on the economy rather than a boost to it.