This chart shows why the UK's post-Brexit economy is 'extremely vulnerable' to a spending slowdown

LONDON — British consumer confidence dropped again in February, driven down by Brexit-induced inflation and stagnant wage growth.

The news adds to a growing consensus that Britain’s household spending boom will stall over 2017 — and that would leave the economy “extremely vulnerable,” according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

To understand how a consumer spending slowdown could impact UK GDP, look at the chart below:

It shows that British consumers were alone in making a significant positive contribution to UK GDP growth in 2016 — household spending has propped up the economy while other key pillars, such as business investment, were driven down by the Brexit vote.

Britain’s dependence on consumer spending is ‘worrying’

Tombs said in a note circulated to clients recently: “This is worrying, because households’ real disposable incomes look set to stagnate this year, as inflation rises, the fiscal squeeze continues and firms hold back from hiring.”

The Bank of England has predicted a decline in wage growth over 2017, and less disposable income means less consumption. Retail sales, which account for 30% of domestic spending, are already falling dramatically, having dropped by 0.3% in January this year alone.

Tombs added: “Barring an improbably large surge in exports, the only way in which GDP growth will maintain momentum this year is if households weaken their balance sheets.”

In theory, households would “weaken their balance sheets” by increasing their level of debt and spending more — by taking out a bank loan, or remortgaging their house.

That doesn’t look like happening, however: Tombs reports that household borrowing in December last year increased by a relatively moderate £1.0 billion, the smallest increase since May 2015.

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