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Bethan Wilkins

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AHDB Pork Market Intelligence

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UK consumer spending now under pressure

Home \ Prices & Stats \ News \ 2017 \ April \ UK consumer spending now under pressure

Theresa May has just announced a snap election for 8 June. One of the many reasons for her deciding this must be at least in part to the strong performance of the UK economy.

Predictions of a post referendum slowdown have not materialised. The GDP growth estimate from the Office of National Statistics (ONS) was 0.7% in Q4 2016, following 0.6% in Q3 2016. This gives an annual growth rate of 1.8%, only fractionally lower than 2015.

Consumer spending has been the main driver of this growth. Despite the referendum bringing about the biggest fall in GfK consumer confidence last July since 1990, it has since bounced back to be broadly in line with its long term average. Reasons for this include low unemployment and real earnings growth still being positive which stimulated household expenditure in all areas, including food.

However, with consumer spending being the main driver of economic growth, this does mean that the economy is susceptible to any changes in consumer confidence, and there are tentative signs that this may be occurring.

Although unemployment is at its lowest since 2004/5, at 4.7%, inflation is beginning to accelerate to the point where it is equal to earnings growth. Inflation is being driven by the fall in the value of sterling, which has pushed up the cost of imports, and goods requiring imported inputs. This includes food and fuel.

The annual inflation rate was 2.3% in March, exceeding the Bank of England’s 2% target for the first time since 2013. This matches the rate at which average earnings were rising at the start of 2017 although the labour market figures are not quite as timely as the inflation data. This signals that we are about to enter a period of negative real wage growth, where prices rise faster than wages, eroding households’ spending power.

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As households are facing renewed pressure on their spending power, growth in spending by households is expected to ease back to around 2% for 2017, with a further slowing pencilled in for next year. Thus the forecast for UK economic growth will be dependent on how much other sectors can fill the gap.

With government spending cuts and with Brexit uncertainties reducing the level of investment in the economy, it is net trade, the difference between growth of exports and imports, which is expected to make an all-too-rare contribution to growth. The fall in the value of sterling has made UK exports more competitive on world markets, which has benefited farmers. They have also benefited from an increase in the Single Payment, which is set in euros but paid in sterling. However, the latest figures for the three months to February 2017 show the increase in the level of exports at 3.8% compared to the same time a year ago, is slower than might be hoped for. Unless this export growth increases, there is a danger that GDP growth will slow down.

For these reasons, whilst under normal economic conditions of near full employment, strong growth and rising inflation, a rise in interest rates might be expected, it is likely that the uncertainty surrounding Brexit may influence the Monetary Policy Committee (MPC) to hold rates steady at 0.25% throughout 2017.

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 Sarah Baker, Senior Analyst

sarah.baker@ahdb.org.uk, 024764 78845