- The British consumer has been hit hard to Brexit as rising inflation makes spending more difficult.
- Some analysts argue that the worst of the slowdown may be over as inflation comes close to its peak.
- Deutsche Bank’s Oliver Harvey disagrees, providing charts to show that more weakness is on its way.
LONDON — Since Britain voted to leave the European Union last June, the country’s economic fortunes have taken a turn for the worse.
GDP grew just 0.3% in the second quarter of 2017, slower than Greece, leaving the UK languishing as the slowest growing economy in the G7. By contrast, Britain has grown at an average of around 0.5-0.7% a quarter in recent years.
The majority of that slowdown is driven by a weakening consumer as the twin impacts of rising inflation and stagnant wage growth, which resulted in a decline in real average pay.
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%, creating a scenario where Brits have less to spend on discretionary items.
Consumer spending has been the biggest driver of Britain’s economic growth in recent years, so as consumers slow down, so to does overall growth.
The story of the declining fortunes of the British consumer goes far beyond this simple trade off, with different areas of spending and demand being impacted in different ways.
Oliver Harvey, macro strategist at Deutsche Bank decided to dive into Britain’s consumer weakness in his latest note, titled “Winter is coming,” circulated to clients at the end of last week.
“The key to our view of weakening UK growth this year was slowing household consumption,” Harvey writes.
“With spending having grown a mere 1% annualized in the first two quarters of 2017 versus 3% last year, is the UK consumer over the worst? We don’t think so. The risks are also shifting away from a real income shock towards other drivers of demand.”
Harvey’s note contains a whole heap of charts about the state of the UK consumer, so Business Insider decided to pull out some of the most interesting:
'Car purchases make up 30% of all transport spending, so monthly data on new vehicle registrations do a good job of predicting transport spending. After collapsing to recession levels earlier this year, registrations remain well below long term averages,' Harvey writes.
When that initial drop came earlier in the year, changes in the way cars are taxed were cited as a potential reason, but Harvey suggests that the lack of any real bounce in the figures as the year progresses suggests that this may not be the case.
Harvey notes that Deutsche tracks two key indicators of household spending on goods and services. First is retail sales volumes tracked on a monthly basis, the chart of which can be seen above.
The second is sales at high street stalwart John Lewis, which is a key provider of bigger ticket items like sofas, wardrobes, and TVs.
'Both imply a further slowdown,' in the near future, Harvey writes.
Next up, overseas tourism by Brits, which despite making up a relatively small part of spending, tends to track broader trends well.
'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,' Harvey says.
'In sum, out of the five high frequency indicators we like to track, four remain weak. A composite indicator of year over year spending suggests a further slowdown in household spending Q3,' he concludes.
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