How far will the pound in your pocket stretch this summer?
May 17, 2018
Last October we published for the first time our British Overseas Purchasing Power (BOPP) Index, which indicates how the purchasing power of UK wages has changed over time in the 27 countries where UK citizens spend the most overseas. The BOPP index combines real wage and exchange rate trends in a single metric, with individual country results being weighted by UK overseas travellers’ spending patterns. So Spain has the highest index weight at 21%, followed by the US, France, Italy and Greece. In total, the euro area makes up 62% of the index, but our BOPP index also extends worldwide to cover countries like Australia, India, Thailand and China.
This year’s edition updates the index and adds some forward projections to illustrate how British holidaymakers’ purchasing power might look during the summer 2018 and winter 2018 holiday periods as compared to the same months in previous years.
Purchasing power of UK wages has taken a hit ever since the financial crisis
Before the financial crisis, the UK enjoyed a decade of steadily rising real wages and the pound was relatively strong. This meant that Brits abroad could generally feel comfortable about how far their money would stretch. But the financial crisis dealt a heavy blow to the pound and, with the subsequent real wage squeeze in the UK, British purchasing power abroad fell sharply after 2007 and remained low until 2013.
We did see a partial recovery in 2014-15 as the UK economy recovered faster than the euro area and the pound followed the dollar up against the euro. Without the Brexit vote, this positive trend might have continued, but the pound started to lose ground after the EU referendum was announced and fell further after the vote to Leave. As a result, the purchasing power of UK wages now sits around 13% below its initial value in 2000 and almost 20% below its 2007 peak as shown in the chart below.
Outlook for summer and winter 2018
Looking ahead to the summer and winter holiday periods later this year, our index projections show a modest rise from 2017 levels, largely driven by a pick-up in the real exchange rate and some recovery in UK earnings growth recently. This recovery, however, is stronger relative to the US than the euro area.
If we compare our index projections for August 2018 and December 2018 with the same months in previous years (see charts below), we find that:
1) UK overseas holidaymakers this summer could find their wages buy around 6% more than they did last August on average across the world, with somewhat stronger rises for the US (9%) than the euro area (5%). But British purchasing power would on average still be around 13% lower than in August 2015, the last summer before the Brexit vote, and around 18% lower than before the financial crisis in 2007.
2) Our new ‘Winter Sun index’, which looks at British purchasing power in popular winter holiday destinations such as Australia, India and Thailand, suggests that UK holidaymakers could find their wages stretch 2% further this December than last year, but this would still be around 10% lower than the pre-referendum level in December 2015, and a massive 33% lower than the peak values seen before the financial crisis in 2007.
The overall message is that the Brexit vote and the financial crisis both significantly reduced how much the pound could purchase overseas and squeezed real wage growth. While this longer-term decline will not be reversed overnight, the good news is that overseas purchasing power has started to recover over the past year, so UK holidaymakers may find that the pound in their pockets stretches a little further this summer than last summer.
We can only hope this positive trend continues, but this will depend on the strength of the UK economy going forward, trends in relative UK interest rates and the outcome of the Brexit negotiations.