In a sign of the tough trading conditions on British high streets two well-known retail names, Toys R Us and Maplin, fell into administration last week.
UK consumer spending has slowed markedly since the summer of 2016, putting pressure on retailers and depressing overall economic activity. With consumption accounting for roughly two thirds of the UK economy, this has been a major contributor to the post-referendum slowdown in growth. Last year UK household spending grew at its slowest rate in five years.
This is not just a high street spending story. Car sales have fallen by almost 11% since last year, although some of the decline is accounted for by plummeting sales of diesel cars. Housing transactions are also running well below the levels of a year ago.
The slowdown has been driven by rising living costs and lacklustre wage growth.
The Brexit-induced decline in sterling has pushed up import prices and driven inflation from -0.1% in late 2015, to 3.0% this January. With wage growth steady at around the 2.0%-mark, real spending power has been badly squeezed.
Consumer confidence has fallen back too. The decline has been more pronounced among those with a university degree, perhaps partly because of concerns about the effects of Brexit. Among those with just a school education confidence has marginally improved. This may reflect the benefits of falling unemployment and rises in the National Living Wage.
Consensus forecasts suggest that the consumer squeeze has further to run. The latest forecasts predict 1.2% growth in consumer spending in 2018, a marked slowdown from the 2.9% average annual growth in 2015 and 2016, and lower than last year’s 1.5% rate.
One bright spot for the consumer is the job market. The UK unemployment rate stands at 4.4%, close to a 43-year low and lower than most advanced economies.
After a long period of weakness, pay pressures seem to be stirring. Employers are reporting recruitment difficulties and official data shows that there are 823,000 unfilled jobs, a 17-year high.
The rate of job changing, which slowed significantly since the financial crisis, has picked up. The number of individuals moving job-to-job in the final quarter of 2017 was the highest in ten years. Wage pressures often come through first in pay for new hires and so it is this time as well. People moving from one job to another have been receiving an average pay rise of over 6%, close to a post financial-crisis high.
The other good news is on inflation which seems at or near a peak. A year ago consumers faced a toxic combination of rising commodity prices and a major depreciation of sterling. Both these inflationary trends have abated. Commodity price inflation has eased and sterling has appreciated slightly since last summer and is trading at 6% above its post-referendum low. The impact of past sterling weakness should drop out of the inflation numbers soon. Import price inflation has fallen from a peak of over 20% in January 2016 to 3.5% today.
So, with inflation set to ease and wage pressure stirring, the worst of the earnings squeeze may be over. But this is unlikely to herald a swift upturn in consumer spending. A number of factors which boosted consumer spending in recent years have become less supportive.
With savings at low levels, and banks tightening up lending criteria, spending is unlikely to get much of a boost from consumers running down savings or from a new credit binge. Interest rates are heading up, many expecting it to rise by 25 basis points(bp) in May, so credit is slowly becoming more expensive.
Unemployment is low, but new job creation is unlikely to maintain the heady pace it has seen in recent years. Finally, the massive boost to consumer spending power that came from payouts for the mis-selling of payment protection insurance, are petering out.
The result is that growth in UK consumer spending in the next couple of years is likely to remain pretty lacklustre. This is causing something of a role reversal. The supposedly free spending Brits are likely to increase spending less than the supposedly cautious German consumers over the next two years.
The worst of the wage squeeze may be coming to an end. But uninspiring growth in consumer spending means that the UK will have to look more to exports, manufacturing and investment to drive economic activity.
PS: In our Year Ahead webinar last month we identified protectionism and a sharp adjustment in equity markets as two risks facing the global recovery. Recent news on both fronts has been worrying. Last Thursday President Trump announced that he would seek to impose global tariffs of 25% on steel and 10% on aluminium imports, in a move that seems likely to trigger retaliation from trading partners. The EU has announced that it will now consider imposing “safeguard” tariffs on imported US steel and aluminium. The move has led to a sharp fall in equities, especially in the US, as investors are worried that reprisals from other countries could spark a trade war and damage growth.