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British consumers are worried about prospects for the economy with Brexit on the horizon, and that could spark a shift in behaviour that drags even more on growth.
Households have driven expansion for more than a year, but only because they saved less to keep up spending during 2017’s inflation surge. They may be less willing to do so if their concerns about weakening growth - and their job security - stay elevated.
According to a monthly index from GfK, a measure of expectations is below the 20-year average and consumers “remain resolutely downbeat about the general state of the economy.” A weaker property market, as seen in the latest Nationwide house-price report, could compound fears.
Mortgage approvals declined in April, the Bank of England (BoE) reported on Thursday. Consumer borrowing, by contrast, rebounded last month to the highest since 2016, suggesting consumers haven’t yet committed to reining in spending.
Dan Hanson, an economist at Bloomberg Economics, says saving is far below a sustainable level, creating a risk of retrenchment. One trigger could be Brexit. The UK’s official exit from the European Union is less than a year away and if the country leaves without a formal deal in place, that could dent confidence.
“The saving rate has fallen off a cliff as consumers carried on spending in reply to a living standard squeeze last year. That stubbornness has left the UK’s biggest spenders in a precarious position, with little buffer to weather any shocks.”
- Dan Hanson, Bloomberg Economics
That means a shock would prompt consumers to save more, which means spending gets cut back and a key support for economic growth disappears. That would be a further blow to Britain’s high-street retailers, already under pressure, and the broader economy. Bloomberg Economics estimates that the UK could even “flirt with recession.”
John Lewis Partnership, an owner of chains of department stores and grocers, said on Wednesday that sales are up 1.5% so far this year, compared with a rate of 2.7% this time last year. Marks & Spencer, a 134-year-old fixture of shopping districts, is closing more than 100 of its biggest stores.
More promisingly in the GfK report, overall confidence improved in May and consumers were slightly more upbeat about their personal finances. That’s been helped by a slowdown in inflation and a pickup in wage growth, meaning workers are now experiencing real pay increases once again.
Some of the concern about the economy may be related to the first-quarter, when growth almost stalled in part because of snowstorms. But there is a risk of a more protracted weakness, something highlighted by BoE Governor Mark Carney this month.
“The weakness in demand at the start of the year could reflect a worsening of the underlying economic climate, not the temporary effects of adverse weather....In particular, there is somewhat greater uncertainty about the near-term momentum in consumer spending at present.”
- Mark Carney, ‘Guidance, Contingencies and Brexit,’ May 2018
While the recent decline in the saving ratio is a natural response to a perceived temporary real income shock, Bloomberg Economics points out that it may not actually be temporary because of the long-term economic impact of leaving the EU.
“Households have behaved as though the real income shock experienced over the past 18 months is temporary - it isn’t,” Hanson said.
“The problem with that assessment is that households have been and will be made poorer by the decision to leave the EU. The saving rate cannot fall indefinitely.”
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