British consumers have suddenly reduced the amount of money they’re holding at the same time as reducing their credit card debt. That, economists are saying, is an ominous sign for the UK economy.
It looks like we’re staring over the Brexit Cliff.
Just before Christmas, the economic data was looking surprisingly rosy. But in January there was a sharp negative turn led by consumers who no longer want to consume:
- Household money holdings are down.
- Unsecured consumer debt is down.
- Consumer confidence is down.
- New car registrations are down.
- Retail sales are down.
- The PMI business activity index is down.
This chart of money held by households, from Pantheon Macroeconomics Chief U.K. Economist Samuel Tombs, shows UK consumers hitting a wall at the turn of the year:
“January’s money and credit data provided another warning sign that the economy has started 2017 on a weak footing. For a start, the three-month annualised growth rate of M4, excluding intermediate other financial corporations — the Bank’s preferred measure of the broad money supply — declined to 1.8% in January, from 3.1% in December,” Tombs says.
On its own, that would not be a problem. But consumers took on less debt at the same time. People are not spending their income, and they are not using credit either:
Andrew Goodwin, Lead UK Economist at Oxford Economics, says that consumers “supported the economy virtually single-handedly last year” but now that support is going away. “Lending of £1.4 billion was some way down on the £1.6 billion averaged during 2016 and chimed in with the recent evidence of a step down in sales on the high street.”
In December, spending was supported almost entirely by borrowing (as opposed to wages). But not in January. No wonder retail sales suddenly plummeted last month. This is Pantheon again:
“Stronger growth in households’ money holdings in the second half of 2016 correctly indicated that consumer spending would surprise to the upside, so its recent slowdown is disconcerting,” Tombs said in a note to clients.
“The decline in year-over-year growth in real broad money holdings indicates that the weakness of retail sales during the last few months likely isn’t just a flash in the pan.”
We’re already seeing the effect of all that in car sales.
Private new car registrations fell 4.4% year-over-year in February down from a rise of 5% in January. The decline came despite an impending rise in Vehicle Excise Duty (annual car tax) due in April, meaning that consumers are actually incentivised to spend now rather than later — and still they did not spend:
Famously, economists expected the economy to collapse immediately after the EU Referendum in June of 2016 — and it did not. The Leave camp has taken that as proof that the UK can sail on without help from Europe.
But with the pound falling and businesses realising trade with the EU is about to get more difficult and more expensive, consumers are starting to become wary and thrifty. Tombs says we are “entering stagflation.” He is forecasting GDP growth (q/q) of just 0.2% in Q1 2017:
Oxford’s Goodwin thinks the Bank of England’s Monetary Policy Committee may have to rethink its data, because the BoE currently assumes robust consumer spending:
“This raised further question marks over the MPC’s latest forecast, with their well above consensus call on GDP growth (2.0% in 2017) founded on the expectation that consumers would continue to borrow more or save less to compensate for the damage to their spending power caused by higher inflation.”
If the trend continues, it is going to completely change the economic backdrop to the Article 50 negotiations. Until now, the UK economy had shown that it does not care whether we are in the EU or not. But now, that tide may be turning.