UK consumers: living beyond their means?

17 March 2017

By Barret Kupelian and Duncan Mckellar

Consumers have been the key driving force of the UK economic recovery both before and after the Brexit vote. Our analysis shows that consumer spending has grown by an average 2.4% per annum faster than inflation over the past four years, well ahead of real disposable income growth. A falling savings ratio – driven in large part by higher borrowing – has added fuel to spending, but it does seem that many UK households are now living beyond their means as a result.

Is strong consumer spending growth set to continue? 

Looking ahead, we expect real household disposable income growth to slow sharply to 0.7% in 2017 and 1% in 2018 as inflation squeezes real incomes and employment growth moderates from recent strong levels. Increased borrowing may help to fill the gap in the short term, but there are limits to how far this can go on a sustainable basis (particularly as and when UK interest rates finally start to rise, which could be sometime in 2018 in our main scenario).

As a result, we expect consumer spending to decelerate markedly from around 3% growth in 2016 down to around 2% this year and 1.7% next year. This projection is subject to substantial uncertainties, not least in relation to Brexit, but some slowdown seems highly likely.

The share of total spending on housing and utilities could reach almost 30% by 2030

Looking further ahead, we expect the composition as well as the level of household spending to change in years to come. Our model projections in Figure 1 suggest that, by 2030, households could be allocating almost 30% of their overall spending to housing and utilities, up from around 25% in 2016. This is a result of expected continuing housing supply shortages relative to rising demand, leading to higher real house prices and rents.

In contrast, we expect the shares of total household spending on food and clothing & footwear to decrease to just 5.7% and 4.3% respectively by 2030. This is because consumers are likely to spend relatively less on essential items as their real incomes rise in the longer term.

Figure 1: Historical trends and main scenario projections for household budget spending shares to 2030

ConsumerSpendingBlog

Impact of Brexit

We have also looked at the potential impact of Brexit on key consumer sectors, focusing specifically on the effects of the weak pound in the short term and possible restrictions on EU migrant workers coming to the UK after Brexit in the longer term.

Our analysis shows (see Figure 2) that the clothing & footwear and food sectors are most reliant on imports and so are expected to be hit the hardest due to the weakness of sterling since the Brexit vote. By contrast, the inbound UK tourism sector is already seeing gains from the weaker pound, notably in London.

Figure 2 - Household consumption import intensities (%)

ConsumerSpendingBlog2

Figure 3 shows that the distribution, hotels and restaurants sector is the most reliant on foreign labour - more than 12% of its workers are from abroad and it therefore appears particularly vulnerable to any future tightening of UK immigration policy that may occur after Brexit.

Figure 3 - Foreign nationals as a proportion of the UK workforce (%)

ConsumerSpendingBlog3

In summary, consumer spending growth has been growing relatively strongly for the past four years, which has in part been fuelled by a declining savings ratio as many households increased borrowing. But our analysis suggests that this cannot continue forever, with consumer spending growth being squeezed as the weak pound pushes up inflation, notably on import-intensive items like food and clothing. In the longer term, shifts in UK immigration policy after Brexit could also have a significant impact on many consumer-focused sectors, including retail, hotels and restaurants.

Barret Kupelian and Duncan Mckellar
Tel: 0207 213 1579 or 020 7804 66726

Twitter
LinkedIn
Facebook
Google+

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated and will not appear until the author has approved them.