The new, sober British consumer
One of the long-running criticisms of the UK economy is that it is too dependent on consumer spending. Britons, so the argument goes, are too eager to borrow and spend and don’t save enough. For most of the last half century or so, consumer spending has indeed, outpaced wider growth in the economy. No longer.
- Ever since the pandemic consumer spending has grown more slowly than the wider economy. Despite a strong recovery in activity this year consumer spending remains lacklustre. In the first six months of the year, GDP expanded at twice the rate of consumer spending.
- Britons seem to have acquired the savings habit. Households saved 11.3% of their income in the first quarter of this year, the latest data available. Outside of the pandemic, when lockdowns restricted people’s spending and enforced high levels of saving, this is a level of saving more normally associated with recessions or big squeezes on consumer spending. The old characterisation of spendthrift Britons looks out of date.
- A move to a more sober UK consumer has been a long time in the making. In the wake of the financial crisis of 2008-10, regulators tightened criteria for mortgage lending which accounts for roughly 90% of all consumer borrowing. With mortgages harder to come by, consumer borrowing slowed reversing the seemingly inexorable rise in the burden of debt. The ratio of consumer debt to GDP hit a peak of 110% in 2010 since when it has dropped to 80%, a 20-year low.
- The pandemic added another major dampener to consumer spirits. Consumer spending dropped at record rates and savings surged. Consumer activity recovered from mid-2020 but at a slower rate than the rest of the economy. While GDP today is 2.3% higher than on the eve of the pandemic, household expenditure is 1.3% lower. In the last four and a half years British growth has been driven by government spending and investment, not by consumers.
- Unlike in the US, where consumers seem to have spent their pandemic-era savings, Britons are hanging onto them. How can we explain the difference in behaviour?
- Most of the pandemic-era surge in savings in the US was a product of the federal government handouts and increased welfare payments. In the UK savings rates rose because consumers made big reductions in their spending. (British consumers cut spending by 25% in the first six months of the pandemic; over the same period US consumers reduced spending by just 10%.) The Office for National Statistics (ONS) suggests that US consumers saw excess savings as a windfall gain to be spent in an economy that has seen a strong recovery. In the UK higher savings were harder earned and, against a backdrop of lacklustre recovery, consumers have held onto them.
- Not only are consumers hanging onto past savings, they are continuing to save an unusually high proportion of what they earn. More than three years after the ending of all pandemic restrictions, levels of savings are, according to the ONS, running at 11.3%, more than three times US levels.
- It is indicative of the change in mood that homeowners are paying down mortgage debt. Through the 1980s, 1990s and early 2000s homeowners tended to borrow against their property, using their homes as security for low-cost credit which was often used for home improvements or major purchases such as buying cars or holidays. Twenty years ago, in the first quarter of 2004, households borrowed the equivalent of 6.9% of their total post-tax income, a huge amount, through so-called mortgage equity withdrawal. For years this form of borrowing acted as a major factor in driving consumer spending and growth. Since the financial crisis mortgage equity withdrawal has gone into reverse. Consumers are using their savings to pay down mortgages. In the fourth quarter of last year repayments of mortgages hit an all-time high, equivalent to 5.3% of GDP.
- What conclusions can we draw from all this?
- First, the UK household sector balance sheet is in better shape than for years. Debt levels are down, savings rates are up and consumers seem to have held onto much of the money they saved in the pandemic. This strengthening of balance sheets means that the UK is likely to be less prone to boom-bust cycles.
- Second, despite a stronger overall position significant numbers of households are in a fragile state. Lower-income households have few, if any, savings or assets. Rising house and equity prices don’t help them. Soaring prices, especially for food and energy, have hit low-income households hard. Meanwhile mortgage payers face a continued feed through of past interest rate rises to their monthly bills. Earlier this year the Resolution Foundation noted that levels of food poverty and material deprivation have risen in recent years. There are a record 2,900 food banks in the UK.
- Third, a period of sustained growth in consumption is in prospect. The economy is on a recovery path and lower inflation is boosting real incomes. With the economy growing and interest rates heading down consumers are likely to cut back on saving and rather spend more. Yet UK consumers are unlikely to give up on the more sober habits of recent years. A return to the sort of consumer booms of old is not on the cards.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.2% at 8,328.
Economics
- Early estimates of activity in August from surveys of purchasing managers suggested accelerating growth in the UK and euro area, and continued but slower growth in the US
- Manufacturing activity was estimated to have increased in the UK but declined in the US and euro area with the decline in the latter driven in part by weakness in Germany
- Central bankers from around the world met at their annual conference in Jackson Hole, Wyoming. US Fed chair Jay Powell said that “the time has come for policy to adjust” while Bank of England governor Andrew Bailey said that he was “cautiously optimistic” on inflation
- Minutes from the US Fed’s meeting in July, published last week, showed that a majority of policymakers thought a September rate cut would likely be appropriate
- Sterling reached its highest level against the dollar in over two years as markets and investors strengthened their predictions of interest rate cuts
- Gold hit a record high of $2,531.6 per ounce as investors seek a hedge against uncertainty and central banks diversify their reserves away from the dollar
- UK energy regulator Ofgem announced a 10% increase in the domestic energy price cap following rising wholesale prices, taking a typical bill to £1,717 a year
- Consumer confidence in August was flat in the UK and saw a mild decline in the euro area
- UK public sector borrowing came in £3bn above expectations in July, adding to the strains on the public finances ahead of the autumn budget
- Growth in negotiated wages in the euro area slowed to 3.6% in the second quarter compared with the same quarter in the previous year, down from 4.7% in the first quarter, strengthening the case that wage and inflationary pressures are receding
- Minutes from the ECB’s July meeting said that policymakers have an “open mind” on whether to cut rates when they meet next month
- Rail strikes in Canada, and potential strikes at ports in the US and India have raised fears of a fresh wave of supply chain disruption ahead of the Christmas retail season
- The Chinese central bank kept two benchmark interest rates unchanged despite a fall in new lending to its lowest level since October 2009, adding to fears of a Chinese downturn
- Amid slow growth in consumption, Chinese premier Li Qiang said that “we must take more powerful measures to boost domestic demand. Boosting consumption is the key.”
- Bank of Japan governor Kazuo Ueda said that global markets remained unstable in testimony to the Japanese parliament
Business
- British tech entrepreneur Mike Lynch was killed after his yacht sank in poor weather in the Mediterranean
- Kazakh company Kazatomprom, the world’s largest uranium producer, cut its production targets for next year in a sign of how a revival in interest in nuclear power may be constrained by underinvestment in new uranium production
- Pharmaceutical giant AstraZeneca warned that it may move a vaccine manufacturing plant from northern England to the US following suggestions that the UK government may cut the amount of state aid offered from £90m to £40m
- US automaker Ford is scaling back its electric vehicle plans due to softer-than-expected demand
- UK supermarket Waitrose announced plans to open 100 new convenience stores while McDonald’s announced plans to open 200 new restaurants in the UK and the Republic of Ireland
- UK secretary of state for Levelling Up, Housing and Communities Angela Rayner overrode Newham council to approve plans for London City Airport to substantially increase passenger numbers
- Founder of the encrypted messaging service Telegram, Pavel Durov, was arrested in France in relation to an investigation on whether the platform had facilitated criminal activity
Global and political developments
- US vice-president Kamala Harris promised to “strengthen, not abdicate” America’s leadership on global issues as she formally accepted the Democratic Party’s nomination for the presidency
- Ms Harris said that she would “stand strong with Ukraine”
- A NATO base in north-western Germany was locked down following intelligence reports of a possible sabotage attack by Russian agents
- Ukraine launched its largest drone attack of the war so far on Moscow. Russian authorities claimed they downed 11 drones with no damage
- Russia launched a significant drone and missile attack on targets in Ukraine including energy infrastructure
- Venezuela’s Supreme Court upheld the contested re-election of president Nicolas Maduro. The United Nations warned that the court was not impartial
- Israel and Hezbollah exchanged more fire across the Israel-Lebanon border in an escalation of hostilities that has raised fears of all-out war
And finally… last week the BBC reported on an office building in Liverpool that has become home to over a dozen crates of snails. The article speculates that this apparent snail farming activity could be seen as “agricultural use” and as such may exempt the building from annual property taxes of as much as £61,000. A spokesperson for Liverpool City Council said that: “The misuse of the agricultural exemption with the use of ‘snail farms’ in commercial premises is a business rates avoidance tactic that has been attempted in Liverpool” and that they would not hesitate to take further action against such tactics – slugging it out